Homeownership and Potential Tax Benefits
There are many advantages to homeownership. These benefits include numerous social advantages as well as financial opportunities. Owning a home is an avenue to increasing personal wealth, protection against inflation, diversification of assets, and offers significant tax benefits. The tax benefits vary whether the property is owner-occupied or a rental property. In this article, the tax benefits of an owner-occupied home are reviewed. The following list compiles the main tax advantages of homeownership:
• Mortgage Interest - According to the IRS, if a property is owner occupied, the homeowner can deduct the interest paid on their mortgage loan and their equity or second mortgage. Each individual can only have one main property, which is where they spend the majority of their time. Equity and second mortgage interest can only be deducted if the mortgage does not exceed the value of the property. Many homeowners take advantage of the mortgage interest tax deduction, consolidating other debts such as auto loans, personal loans, and credit cards into equity or second mortgages. This not only lowers their interest rates on their debt, but allows the interest to be deductible.
• Real Estate Taxes/Private Mortgage Insurance - The property taxes for owner-occupied dwellings may be deducted on an individual's tax returns. If your monthly mortgage payment includes private mortgage insurance, it may also be deductible on your tax return.
• Business Expenses and/or Rental Income- If you use part of your home for your business or you rent out part of your home, the IRS may allow you limited deductions for your expenses.
• Capital Gains - This is a tax break if you sell your owner-occupied home for a profit and then use the profit to purchase another property. Typically on any other type of asset, if you made a profit you would pay tax; but for your owner occupied dwelling, the profit can be exempt from taxes if the profit is used to buy another owner occupied property.
• Moving Tax Credits - If it is necessary to move for employment, moving expenses may be deductible on your tax returns.
There are many other deductions that you may want to research before purchasing a house. There may be expenses on the settlement or closing statement that you should receive when obtaining your mortgage. You should review your HUD closing statement and discuss potential deductions with your CPA or tax preparer. They can then explain how these tax deductions would benefit you. Always keep in mind, tax laws are constantly changing and can be extremely complicated, so always discuss your options with a knowledgeable CPA or tax preparer.
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