Benefits of Homeownership
Homeownership can be intimidating for some first-time home buyers, but the benefits of homeownership should quickly dispel any reservations the buyer may feel. By far the greatest benefit you can receive from homeownership is the equity, which is basically the amount of the home you actually own. When you’re renting, you simply pay the landlord each month for using his property, but while that money provides a place to sleep at night, a house provides that and so much more. Unlike the money you pay to a landlord, the money you pay toward your mortgage increases the equity you have in the home; you are slowly buying the entire home rather than giving the landlord seemingly endless amounts of your hard-earned cash. You have the freedom to paint your living room light blue, remodel the kitchen, or even add a whole new room. The privacy of your own home is unmatched, and the pride that comes with owning a home feels fantastic all by itself.
Although purchasing a house comes with all sorts of advantages, it does have its shortcomings. The government charges a homeowners tax to improve the community with roads and schools. Nobody really enjoys paying taxes, especially not someone who just committed to a mortgage, which already seems to be sucking their hard-earned money down the drain. Luckily for homeowners, a myriad of tax benefits, specifically tax deductions, come along with homeownership. Tax deductions work like refunds that the government provides on parts of your mortgage, like interest, insurance, and points. These deductions can save you from spending even more money in taxes if you own a home. Taxes aren’t legally avoidable, but getting a refund through tax deductions works as a good substitute.
Tax Benefits of Homeownership
Real Estate Tax
Real estate tax is the IRS’s term for property taxes. Property taxes are placed on land, buildings, and any other immovable improvements to a piece of property. These taxes are determined by a tax assessor hired by the government to estimate the value of the property. The money collected from these taxes goes toward improving roads and building schools, among other useful services, so the money does go back to helping your community.
Mortgage tax is simply a tax on the buyer’s mortgage. This tax only exists in some states: Alabama, Florida, Kansas, Minnesota, New York, Tennessee, and Virginia. The rates vary between these states with the lowest tax in Alabama and most expensive in New York.
Taxes on Canceled Debt
If you were unable to pay off your loan, especially in times of unemployment and slow economy, you may have been forced to short sell your home. In a short sale, you sell your home for less than the mortgage cost, but the lender cancels the remaining debt you have on the home. This was considered taxable income until the Mortgage Debt Relief Act of 2007. By creating this act, cancelled debt is no longer taxable income until the end of 2016, but after the year ends, it’s up to the government to decide whether or not the act will be renewed.
Tax Deduction Benefits of Homeownership
Your real estate tax is deductible on federal taxes the year you paid for it. If you were to pay for your 2016 real-estate tax a year early (2015), then you could only deduct the real-estate tax for 2016 on your 2015 tax forms, not your 2016 tax forms.
The biggest tax deduction you can receive is on your mortgage interest. The interest is deductible up to a $1 million loan, and the deduction can apply to multiple properties. If you own two homes, the interest is still fully deductible up to the combined interest for both houses of $1 million.
Private Mortgage Insurance
Private Mortgage Insurance, or PMI, can be deducted from your taxes. This insurance protects the lender and borrower in cases where the borrower is suddenly unable to make mortgage payments, and the insurance premium is tax deductible!
Discount Point Fees
You can use points to decrease your mortgage interest rate, but they enable you to save on more than just your mortgage. Each point is worth 1 percent of the loan amount, and each point is fully tax deductible as long as they meet a set of requirements including the loan being secured by your main home. Points are calculated as a percentage of your mortgage principal amount, and the funds you pay at closing must be at least as much as the points closed. Veterans who take advantage of VA loans will receive even further benefits based on points and their tax deductions. Borrowers can arrange for the sellers to pay for discount points, but even if the seller did buy the points for the borrower, the borrower can still deduct these from their taxes.
An interesting tax deduction involves installing energy-efficient upgrades to a piece of property. There are two different categories the government considers deductible. You can qualify for the Residential Energy Efficiency Property Credit by adding solar panels, solar-powered water heaters, wind turbines, and other forms of environmentally friendly energy production and receive up to 30 percent of the cost, including installation. The Non Business Energy Property Tax Credit includes more accessible upgrades, such as home insulation, exterior windows and skylights, electric heat pump water heaters, stoves that use biomass fuel, and many others. You can receive anywhere from a 10 percent to 100 percent refund depending on the type of upgrade, but some limits do apply.
VA Funding Fee
The VA funding fee is tax deductible regardless of whether it was paid in closing or was bundled in the mortgage. However, if your adjusted gross income is more than $109,000, you won’t qualify for the deduction.
At Low VA Rates, we understand taxes and tax deductions, and we make it our business to help you save on your home before you even have to pay taxes. Low VA Rates is dedicated to providing you with a great deal and a very low rate on your mortgage. If you have more questions about the benefits of homeownership, give us a call now at 855-223-0705.