For many families in the United States, buying a home is one of the biggest milestones they strive to achieve. It also comes with the added benefit of drastically increasing your net worth.
Many people are on the fence when determining whether buying a home is the right decision. But, for those unaware, there are numerous tax benefits of buying a home.
Not sure where to start? Don't worry, we’ve got you covered.
Let's take a look at everything you need to know.
1. Interest Deductions on Your Mortgage
Most buyers will be pleased to know that they can deduct the interest that they pay on their mortgage from their taxes. While this only applies to home financing that's less than $750,000, chances are that the average first-time buyer will be able to take full advantage of it.
You're also able to deduct any interest that you paid as part of the closing costs associated with your purchase. Typically, you can find this number on the settlement sheet.
Before the year's tax season begins, your lender will send you an IRS Form 1098. This document will detail all of the money that you paid in interest on your loan throughout the past year.
2. Private Mortgage Insurance (PMI) Deductions
Similar to how you're able to deduct interest that you pay on a mortgage, you can also deduct the amount you pay for private mortgage insurance.
For those who are unfamiliar with the term, buyers who put down less than 20% of the value of their home will be required in most cases to purchase private mortgage insurance. This coverage is designed to protect your mortgage lender in the event that you quit making payments toward your loan.
Since it's not always possible to put down 20%, deducting the cost can lessen the financial burden slightly. The criteria for this deduction is as follows:
- You purchased your home after 2007
- Your AGI (adjusted gross income) is less than $50,000 ($100,000 if married)
If you satisfy these requirements, this is an option always worth looking into to save a bit of extra money.
3. First-time Buyer Benefits
It's not uncommon for homebuyers to pull a bit of money from their IRA in order to get enough capital for their purchase. Under most circumstances, the IRS imposes a 10% penalty for withdrawing money from this account before you're 59-and-a-half years old.
If you have never owned a principal residence in the past two years, however, you can withdraw up to $10,000 without any penalty at all. This amount is $20,000 if you are married.
Additionally, the residence doesn't have to be for yourself— it's possible to purchase a home for a family member using this method. It's important to note, though, that any funds you take out of your IRA must be used within four months of the withdrawal.
4. Property Taxes
Homeowners are able to deduct up to $10,000 per year when it comes to property taxes.
If you pay your property taxes through your lender (such as through an escrow account), the aforementioned IRS Form 1098 will have that amount for the past year. For those who pay taxes Directly to their municipality, it's imperative to keep financial records of the amounts that you paid throughout the year.
In combination with the other tax benefits of buying a home, deducting your property taxes can prove to save you thousands of dollars.
5. Home Office Deductions
If you work from home, you can deduct the square footage that you use for your office. Similarly, you can also factor in the resources that you use to facilitate your business or occupation (such as office supplies, equipment, etc.).
It's important to note that because this deduction has a high probability of being abused, it's capped at 300 square feet for office space. Additionally, the other guidelines associated with home office deductions are fairly rigid.
So, it's highly recommended that you enlist the help of a tax professional when looking to get the most out of this amount.
6. Tax Benefits From Selling
In the event that you sell your home, you'll be subjected to capital gains tax. This technically applies to the sale of any asset where the current value of the initial purchase price is less than the price that it sold for.
When it comes to a house, though, you're excluded from paying capital gains tax on the first $250,000 of profit. Married couples are exempt from paying tax on the first $500,000 of profit.
As you can see, this is one of the most significant benefits to keep in mind. In some cases, it's possible to experience hundreds of thousands of dollars in profit without having to pay any capital gains tax on this amount.
But, in order to exercise this privilege, you'll need to have lived in your primary residence for at least two years out of the past five years. If you don't satisfy this requirement, you won't be able to take advantage of the deduction.
Something important to note is that you can add the cost of any home improvements that you've made to the value of the home before you sell it. This will result in a lower overall profit from the sale of your home, which could be enough to keep you under the $250,000 or $500,000 limit.
Buying a home can seem difficult, but educating yourself before and throughout the process makes it less so.
With this information about tax benefits, you'll be well on your way toward making the decision that's best for you and your future.
At Brightland Homes , we believe happiness starts at home, and we’re here to help you find the perfect house for you and your family. Fill out the form below today, and we'll get started.
