Many Americans got some depressing news last week; either their tax
return was not as large as they had hoped or, in some cases, they were
told they owed additional money to either the Federal or State
government or both. One way to save on taxes is to own your own home.
According to the
Tax Policy Center’s
Briefing Book -“A citizen's guide to the fascinating (though often complex) elements of the federal Tax System” - there are several tax advantages to homeownership.
Here are four items, and a quote on each, from the
Briefing Book:
1. Mortgage Interest Deduction
“Homeowners who itemize deductions may reduce their taxable income
by deducting any interest paid on a home mortgage. The deduction is
limited to interest paid on up to $1 million of debt incurred to
purchase or substantially rehabilitate a home. Homeowners also may
deduct interest paid on up to $100,000 of home equity debt, regardless
of how they use the borrowed funds. Taxpayers who do not own their home
have no comparable ability to deduct interest paid on debt incurred to
purchase goods and services.”
2. Property Tax Deduction
“Homeowners who itemize deductions may also reduce their taxable income by deducting property taxes they pay on their homes.”
3. Imputed Rent
“Buying a home is an investment, part of the returns from which is
the opportunity to live in the home rent-free. Unlike returns from other
investments, the return on homeownership—what economists call “imputed
rent”—is excluded from taxable income. In contrast, landlords must count
as income the rent they receive, and renters may not deduct the rent
they pay. A homeowner is effectively both landlord and renter, but the
tax code treats homeowners the same as renters while ignoring their
simultaneous role as their own landlords.”
4. Profits from Home Sales
“Taxpayers who sell assets must generally pay capital gains tax on
any profits made on the sale. But homeowners may exclude from taxable
income up to $250,000 ($500,000 for joint filers) of capital gains on
the sale of their home if they satisfy certain criteria: they must have
maintained the home as their principal residence in two out of the
preceding five years, and they generally may not have claimed the
capital gains exclusion for the sale of another home during the previous
two years.”
Bottom Line
We are not suggesting that you purchase a house just to save on your
taxes. However, if you have been on the fence as to whether 2017 is the
year you should become a homeowner, this information might help with
that decision.
Disclaimer: Always check with your accountant to find out what tax advantages apply to you in your area.
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