Tax Advantages of Owning a Home

Tax Advantages of Owning a Home

While owning a home has widely been considered the American dream and one of the best ways to build long-term personal wealth, the tax benefits of buying and owning a home are often overlooked and not considered. There are various different tax benefits available to homeowners that are not available to renters. These tax benefits typically save homeowners thousands of dollars per year in federal income tax liability. While there are many tax incentives available to tax payers, owning a home is the greatest tax benefit of all.

Deduct Mortgage Interest

The first tax benefit that is available for a homeowner is that they can deduct mortgage interest from their tax statement. This is an enormous tax benefit as mortgage interest tends to be the most significant cost in any homeowner's housing payment. For example, a person with a $300,000 mortgage at 6% interest will pay $1,500 per month or $18,000 per year in mortgage interest. 100% of the $18,000 would be tax deductible. Depending on a homeowner's tax bracket, which ranges from 25% to 33%, this could lead to an additional $4,500 to $6,000 on the homeowner's tax return. However, as a mortgage gets paid down over time, less and less of the homeowner's payment will go towards interest. Therefore, the mortgage interest tax benefit will decrease over the course of the mortgage.

Deduct Property Taxes

Another first tax benefit that is available for a homeowner is that they can deduct real estate and property taxes that they pay on their home. Depending on the location of the home, real estate taxes can be quite expensive and can cost over 2% of the home's value. Since home values generally appreciate overtime, the amount owed on property taxes will also increase. This can also be a great tax benefit. For example, a person who owns a $300,000 home could expect to spend $6,000 per year on real estate taxes. Depending on their tax bracket, this could lead to an additional $1,500 to $2,000 on their tax return.

Homebuyer Tax Credit

To encourage new homebuyers to purchase a home, the federal government has issued a first time homebuyer's tax credit. This tax credit will give a first-time homebuyer a tax credit of up to 10% of the purchase price, which maxes out at $8,000. This tax credit will be received by the purchaser on the first tax return they receive following the home purchase.

Energy Efficiency Tax Credit

Another tax credit for homeowner's is in regards to improving their home with energy efficient additions. Many homeowners' will qualify by installing energy efficient windows, doors, or appliances. These credits often end up covering the vast majority of the expense that the homeowner incurs, which essentially makes the additions quite inexpensive. These energy efficient additions will also decrease their utility bills and increase the value of their home.

Allows For Itemization of Other Deductions

The third large tax benefit that is available for a homeowner is that by having deduction for interest and property taxes, they are now able to itemize other expenses. Most non-homeowners are not able to benefit from various tax deductions that are available to them. This is because all tax payers are given a standard deduction of about $5,000. Each tax payer then has the choice of either taking the standard deduction or itemizing. If a tax payer has deductions of less than $5,000 then itemizing deductions is not worthwhile. On the other hand, tax payers who are homeowners most likely will have at least $5,000 of deductions due to interest and taxes. These homeowners are then able to deduct other items including student loan interest, donations to charity, and possibly sales tax paid.