But should you consider buying a home because of the tax benefits? Well, let’s first break down 3 major tax benefits that owning a home can provide you:
Mortgage Interest (in most cases)
If you own a home and don’t have a mortgage worth more than $750,000, you can deduct 100% of the interest you pay on the loan. You’ll be sent IRS Form 1098 from your lender which will detail the amount you paid in interest for your loan on your tax return. You can also include interest that you may have paid as part of your home closing–you can find this on the settlement sheet. If the mortgage amount is greater than $750k, you still get tax benefits but the deduction will be limited per the new Tax Reform.
Read more about it here.
Another benefit from owning a home is the ability to deduct your property taxes. Under the new 2018 tax law, you can deduct up to $10,000 for a combination of local income taxes or sales taxes. The new limited deduction for state and local taxes is one of the major setbacks for homeowners. You see, in expensive ass California (where I reside), I have clients who used to be able to deduct over $100,000 in state and local tax (a combination of property tax and CA income tax withholdings). That $100k deduction is now limited to $10k which resulted in rather large tax bills for folks who once benefited greatly from 6 figure itemized deductions.
Future homeowners in states where the cost of living is high and the median cost of a home can easily be well over $750,000 such as California and New York, may need to think twice if considering purchasing a home solely for tax savings. Every situation is different so I’d recommend to work with a tax professional before buying.
Learn more about the property tax deduction here.
Selling your home
You may have signed onto a 30-year mortgage but that doesn’t mean you’ll stay at that home for 30 years.
It’s more likely you’ll sell – and that’s totally fine, there are tax deductions for that too. The IRS can allow exclusion from capital gains tax when you sell your primary residence, meaning you’re not taxed on a healthy portion of any gain or profit that you realize. If you’ve lived in your house for at least two years after five years before selling \you qualify. That’s a whopping $250,000 (non-married) or $500,000 (married) capital gains exclusion for selling your primary home. Of course, if for some reason you don’t qualify for the full exclusion, depending on your situation, your exclusion amount could be prorated.
Learn more here.
Buying a home is an important investment, but the tax benefits alone shouldn’t be the only reason you purchase. While there are several financial wins buying a home can provide you, it has to be right for you in the right moment. It’s too big of an investment to act in haste. The tax benefits are the cherry on top of the milkshake, not the full course meal.
To more money in our pockets,
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