There are many advantages of owning a home over renting. While renting certainly can work in the right situation, there is no question that over time you are getting the short end of the stick. Homeownership allows you to build equity, which you can use for a variety of benefits in the short and long term. Perhaps the greatest benefit of home ownership are the tax implications afforded. There are a handful of real tax incentives aimed at attracting home ownership. Some of these can greatly impact the bottom line of your tax return and make owning a home a no-brainer over renting. Here are the four greatest tax benefits of owning a home.
Property Tax Deductions.The government makes it as attractive as possible to own a home. Yes, you must pay annual property taxes as an owner, but you are able to deduct them on your tax return. All tax returns should be viewed on an individual basis, but there is no question that deducting taxes helps. Even if you escrow your taxes are included in the payment you will get the tax deduction. Individually, this may not tilt the return much in your favor but coupled with the other deductions can have a nice impact.
Interest Deduction.As a homeowner your monthly payment consists of four core items: principal, interest, taxes and insurance. Depending on how much your down payment is you may also have something called private mortgage insurance (PMI). If you have ever looked at your loan amortization chart you will see just how much interest you pay in the first half of your loan. In fact, most of the repayment in the first 10 years of your loan goes towards the interest. Fortunately, you are able to get something for these payments. You are allowed to deduct the annual interest payments on your tax return. For the first half of your loan this will be a sizeable amount. You don’t have to do any calculations or be a financial wiz to figure out the interest payments. Your lender will send you a summary after the first of every year.
Closing Costs.Property tax & interest payment deductions continue for as long as you own the property. Some benefits are for short term use only. In the tax year that you close on your property you can write off the closing costs on the loan. It is important to understand the distinction between closing costs and prepaid escrow items. Closing costs consist of attorney fees, lender fees and any points to a mortgage company. The prepaid items for your taxes and homeowner’s insurance are not included in the costs.
Rental Income.Perhaps the greatest tax benefit of homeownership is the ability to take advantage of rental properties. Income received from a rental is not taxed like ordinary income. In fact, that income is not taxed at all. This may not seem important if you are looking for your first home, but it should be a consideration. FHA has a handful of reduced down payment programs that allow for 1-4 units. By purchasing a two-family property, you can receive income from the second unit to defer the cost of your mortgage. This income is not taxed and can be a great long-term benefit.
Buying a property for the tax benefits alone is not a good reason to make an offer. However, when you add all the wonderful benefits into the mix it greatly tilts the decision in the favor of owning.