The Benefits of Home
Ownership
I don’t know about you, but that is a saying that I have
heard, a lot! But what exactly does it
mean? Most of the time, when that
statement was uttered, it was spoken with a sarcastic tone and the eyes were
rolling. However, let me try to spin a
POSITIVE angle on it.
Now, we are all aware of the easily understood benefits of
owning a home. The top of that list is
filled with thoughts of the freedom to do as one pleases in the lines of
decorating, painting and remodeling.
Being the true royal owner of your castle means that you never need to
ask permission to do what you want to the house. Unfortunately, no matter be an owner or a
tenant, you do always need to be in good standing with the HOA of the
neighborhood, but let’s leave that debate for another time!
Those are all great reasons in their own right, but there
are deeper benefits to owning a home, as well.
Some of these benefits affect your check book…and in a good way,
too! Let’s take a look at the tax
benefits of buying and owning a home.
THE
PURCHASE
Most of the necessary expenses
required during the purchase of a home are NOT tax deductible. Ah, I said most. What is tax deductible? According to the IRS, you CAN deduct interest
in that year that it is paid. Generally
speaking, this interest is paid monthly and is wrapped up in each monthly loan
payment. In addition, if the day you
purchase is on any day other than the first of the month, you will likely pay a
charge for "daily interest" between the day of closing and the end of
the month. Line 901 of
your HUD settlement statement shows what this charge is and your tax consultant
can make those numbers work in your favor!
Much more importantly, the IRS says
that, in most cases, loan discount points and origination fees are tax
deductible to the buyer, regardless of who pays them. Lines 801 and 802 of the
settlement statement will reflect this jackpot. This is a particularly unusual
deduction because you get the benefit even if the seller paid your closing
costs. And because origination fees of 1% and more are common and this can
amount to a lot of cash.
MORTGAGE INTEREST
In general, it is acceptable to
deduct the interest charged on a loan used to acquire or improve your principal
residence in the year that it is paid. In the early years of a loan, most of
your monthly payment is interest, so this can significantly add up. If you are in a 28% federal tax bracket, this
can have the effect of lowering your borrowing costs by almost a third. Again, your tax consultant can verify this
for you.
Another benefit is that you can
always deduct interest on an additional $100,000 of mortgage debt. This money can then be used for any purpose.
This is called the "Home Equity Loan" exception, and it allows you to
to use your home equity for any purpose. This would enable a homeowner to use
the money for a remodel. The more
popular use is to “shift debt” or to pay off a larger debt. For example, if you live in an apartment and
have a credit card balance of $10,000 at 18% interest, none of that interest
would be deductible. But if you bought a house, obtained a home equity loan for
$10,000 and paid off the credit card, then ALL of the interest expense becomes
automatically deductible. Furthermore, the rate on the home equity loan is
likely to be around prime plus one or two, usually much lower than credit card
rates. This same technique works with any and all personal debt, from car loans
to consolidation loans - with only one hitch...and it is a big one. In every home equity loan, you have pledged
your house as collateral for the loan. If you fail to pay the payments as
agreed, you could lose your house to foreclosure. So be careful in using this
technique. But then we can talk about
refinancing and improving the terms of your mortgage!
THE SALE
This benefit is the best, so
rightly so, I am saving it for the last!
Very few
people ever keep the first house they buy, much less most of the houses after
that. Eventually, they end up selling
it. If you have owned AND occupied your
principal residence for at least two of the past five years, you can earn up to
$500,000 on the sale of that house and
pay no federal income tax whatsoever. That's assuming you are married - singles
get up to $250,000 tax free.
This can be
done forever…at least every two years as long as you have lived in the
house. It is perfectly legal as long as
you have lived in the house. For the
right person with a long term goal of achieving your “dream house”, this
benefit could be utilized to get it. You
can buy, sell, buy and upgrade, sell and continue buying and selling every two
years until enough money is made to finally land that home that is your American
dream!
Contact me
and let talk further about your plans.
Even if buying isn’t in the cards today, I can help you get it into
tomorrow’s plan. There isn’t anything
wrong about planning today for your future tomorrows. I would be more than happy to help you get to
where you want to be! The first step
might be as simple as contacting me.
Bo Turocy
"Keeping it realty!"
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