When you are considering a home purchase, it is important to understand all the various benefits (and possible downsides) to your decision. A major benefit that comes from ownership – one many first-time buyers are unaware of – is the tax benefits that come with buying. Once you purchase your home, you will be able to take advantage of several tax benefits that renters do not have access to.
4 Tax Benefits From Ownership That You Don’t Get As A Renter
1. You can deduct property taxes.
When you own a home, you will be required to pay property taxes. While the prospect of paying these taxes – which can vary by city, county and school district – may not seem too appealing, you can take comfort in the fact that you can deduct those taxes. Owners get to deduct the full amount of property taxes they pay, which can be thousands of dollars.
As a renter, your landlord is taking advantage of this benefit. As an owner, now you can.
2. You can deduct the interest you pay on your mortgage.
Hopefully when you buy your home you will be able to get a great interest rate on your mortgage. But even with a low rate, you will still be paying a considerable amount of interest each year. Fortunately, you can deduct this interest (up to $1 million, or $500,000 if you are married and filing separately). In fact, for a few years the payments you make on your mortgage will be mostly interest, so your deduction can be significant.
When renting, you don’t have the option of deducting any portion of your rent payments.
3. You can deduct mortgage insurance.
Most people require a mortgage to purchase a home, and many of those people are not able to come up with the full 20% down payment that has been considered standard for so long. Luckily. with mortgage options like an FHA loan, you can buy with a much smaller down payment than 20%. However, if you purchase without a 20% down payment, you will probably be required to pay for mortgage insurance.
Again, there are tax benefits to this situation. As long as you make less than $100,000 a year, you can deduct the full amount you pay for mortgage insurance.
4. You can deduct discount points.
When you go to get a mortgage, you will probably be given the opportunity to buy discount points. A single usually costs 1% of the amount of your loan. So if you had a $400,000 loan, a point would cost you $4,000. With each point you buy, you mortgage rate lowers. You can deduct the amount you pay for these points from your taxes.
Keep in mind, discount points are not always a good deal. It really depends on your individual circumstances. Don’t simply buy points to get the tax deduction. But if your accountant or financial adviser tells you that it’s worth it, you can buy one or more points and then use the deduction your first year after buying your home.