Friday, February 04, 2011
The Tax Benefits of Home Ownership
Buying a home provides some benefits.
1) Home mortgage interest deduction. The interest paid on a mortgage or mortgages of up to $1 million for a principal residence and/or second home is deductible as an itemized deduction. This deduction can reduce the cost of borrowing by one-third or more.
2) Home equity loan deduction: Homeowners can borrow up to $100,000 against the equity in their home and deduct the interest as an itemized deduction. The money can be used for any purpose.
3) Property tax deduction: Homeowners also get to deduct from their federal income taxes the state and local property taxes they pay on their home. This is another itemized deduction that renters don't get.
4) Deductible homebuying expenses: Some closing costs in a home purchase are also deductible as itemized deductions, including loan origination fees called points, prorated interest on a new loan, and prorated property taxes paid at settlement.
5) home-sale exclusion: Profit when you sell - you must have lived in your home for two of the prior five years prior to its sale - you need pay no income tax on a substantial amount of their profit -- $250,000 for single homeowners and $500,000 for married homeowners who file jointly. Can be used once every 24 months.
6) Free rental income: You can rent your home out for up to 14 days during the year and pay no tax at all on the rental income.
7) Business use of your home: If you have a home business and have a home office you may qualify for a deduction.
Tax benefits of renting:
The only tax benefit that a renter can qualify for is the home office deduction. This is a business deduction available to renters who own a business and have a home office they use regularly and exclusively for business purposes.
A good rent vs. buy tool can be found on the Smart Money Magazine website: click here
Be sure to consult your tax professional.