Buyers / Tax Advantages for Homebuyers

Tax Advantages for Home Buyers

After buying your new home, you can take advantage of tax savings available only to homeowners. Although tax laws have changed considerably in recent years, owning a home remains an excellent investment.

Income Tax Deductions:

As a homeowner, you can deduct the items discussed below:

• Real Estate Taxes. The full amount of annual real estate taxes (also called property taxes) is a permissible income tax deduction for all homeowners.
• Mortgage Interest Payments. In most cases, you can deduct all of the interest paid on your mortgage. For example, interest payments on a 30 year, $100,000 mortgage at 10% interest amount to almost $10,000 during the first year after purchasing the home. This amount is an authorized deduction, and it represents a major tax savings for you. In addition, if you pay off your mortgage early, any fee paid as a prepayment penalty is considered tax-deductible interest.
• Points Paid to Lenders. You can also deduct, as interest, the points paid to a lender to obtain a new mortgage, provided that the payment represents compensation paid to the lender solely for the use of money, rather than for any specific services. The points are fully deductible only in the year of payment.

Your income tax advantages from home ownership continue as long as interest, real estate taxes, and other deductions exceed the standard deduction. With a fixed rate, regularly amortized mortgage, the amount of tax deductible mortgage interest declines over the lifetime of the loan as an increasingly larger share of monthly payments is applied to repayment of the principal.

Capital Gains Tax on Home Sales and Purchases:

The advantages of homeownership continue even if you decide to sell your home.  

If you sell your home, the tax on any profit will be deferred if you buy and occupy another home of equal or greater purchase price within 24 months before or 24 months after the sale of the old residence.                                                   

For example, a home you bought 10 years ago for $40,000 might be worth $100,000 today giving you $60,000 profit if you were to sell. But, if you buy another house for $100,000 or more, the profit on the $60,0000 will be deferred. The tax is not avoided: it is simply deferred until the home is later sold and not involved in the purchase of a home greater or equal value. The profit you receive from the sale can be further reduced for deferment when you deduct the following expenses in a capital gains situation:

• Expenses incurred when you bought the house, such as survey and appraisal fees, title insurance, and broker’s commission.
• Cost of all improvements you made to the home, for example, a new roof, the addition of a room, or the installation of central air-conditioning, plumbing or heating systems.
• Fix-up expenses, if you incurred them during the 90 day period before you entered into the contract to sell.