Have you ever had your accountant tell you that you needed to buy a house? How about your parents? The reason they are telling you to do that is because they understand the tax advantages of owning a house vs. renting one. Owning a home is more than a place to live. It is also an asset that should grow in value that can give you some tax advantages. Your parents, CPA, and grandparents were RIGHT!
Homeownership is part of the American Dream as it’s hard to save up for that down payment after years of hard work. Here’s what you need to know about the tax advantages of buying a house
People buy houses for many reasons, but one of benefits of homeownership are the tax deductions you will receive as well as tax-free appreciation on your asset when it’s your primary residence. This article hits home for me as my parents never took advantage of writing off their interest on their home. They had a very bad accountant who never wrote off $1 in interest for them on mortgage payments for over a 20 years! I about flipped when I heard this and my main reason for writing this article. It’s very simple to do so let’s break it down for you.
At the very beginning of the loan you will pay much more in interest than on principle. As your loan matures you will slowly pay more toward the principle lowering your balance, but regardless of how long you have the loan, any interest paid on your loan is 100% tax deductible as long as the property is your primary residence. This means you get to write off the interest you paid over the course of the year.
Additional Tax Advantages To Buying House-Property Taxes
Another tax advantage to buying a house is that you get to write off your annual property taxes. Once you own a property you will have a tax bill associated with it. This means you are required to pay the annual property taxes on the property. I know nobody likes to pay taxes, but it’s part of homeownership. The good news is that you can also write off your property taxes. Let me explain a little further exactly how this works.
What’s Next? Tax Advantages To Buying A House
At the end of each year you will receive a 1098 Interest statement from your mortgage servicer. A 1098 statement is a form that itemizes how much you paid in interest over the course of the year. This is required to be reported by your mortgage servicer. If you escrow your annual property taxes(highly recommended), the total taxes you paid will also be disclosed on the same form. It is a simple one page form that you DO NOT want to throw away when you receive it. This is the form that you will give to your accountant if you do not file your own taxes.
Let’s take this into an example so it makes more sense.
John Smith buys a house and over the course of the year he pays the following:
$9,000 in Interest
$4,000 in property taxes
At the end of the year John will receive a 1098 statement from his mortgage servicer. On that statement, it shows that John paid the above referenced numbers over the course of the year.
John makes $75,000 a year
His total deductions are $13,000($9,000 interest+$4,000 real estate taxes) for that year since he lives in the property as his primary residence.
He will pay taxes on $62,000 vs $75,000.($75,000-$13,000).
How much did John save on taxes this year? Depending on John’s tax bracket he is able to deduct $13,000 of income. Have you ever seen the rent vs. own calculators online? Did you ever notice how they all seem to always come to the conclusion that it’s cheaper to own vs. rent? Many times it is because they take into consideration the tax deductions of buying a house that do not exist if you were to rent. This is how you take the tax advantages of owning a house.
That’s it! It’s a very simple process,however it is you responsibility to claim your own deductions. The Government is not going to take your deductions for you. This means that you have to make sure you write the taxes off when tax time comes around. I’ve seen plenty of people not take their deductions and it drives me crazy! I always recommend hiring a tax professional to do this for you. I am not an accountant or a CPA and am not giving you tax advice. However, this is exactly how it works and how homeowners claim their deductions. If you purchased the property in the same year of filing you can also have some of your closing costs written off as well.
Tax Advantages To Buying A House Conclusion
A few years ago I read a statistic that only 26% of home owners claimed their deductions? I’m not sure if that number is accurate or not, but it’s one of the reasons I am writing this blog. If I can help a few people save some money then I can sleep well at night. There has been some talk in Congress about eliminating interest write-offs so that homeowners can no longer use these write-offs. As in any argument there are two sides to this however I personally would hate to see it expire.
If you are looking to buy a new home and want an aggressive bulldog Realtor, then check me out. I promise you nothing but the best advice or I’ll literally help you move. It’s only a conversation and you can see if I know what I’m talking about.