Becoming a Homeowner: The Tax Benefits

If you want to buy a home and become a homeowner, you may know that there are benefits and tax advantages, even though you may not be certain of what all these benefits are. There are actually many tax benefits which a homeowner can enjoy.

1 – Itemized Deductions

From a general viewpoint, you cannot deduct the rent of an apartment or home. However, you can demand an itemized deduction in the interest that you used to pay for a primary residence’s mortgage debt.

Remember also that the itemized deduction is on the interest that you pay on a maximum of $1 million in mortgage debt. You can apply the same to a maximum loan of $100,000 in home equity debt interest. In order to make your mortgage more secure, you can put a deduction on the point which you pay, or in some cases, the seller of the home pays the point in your name.

2 – Home Equity Loans

In case you are already a homeowner, you should be careful with home equity loans. You cannot make an interest deduction if the total sum of the home equity loan and the first mortgage is higher in value than the home itself.

For example, assume that your home has a value of $200,000 and the remainder of your first mortgage is $150,000 and the home equity loan is of $75,000. In this case, due to the value of the home, you are allowed to make an interest deduction only on $50,000 from the principal of the home equity loan.

3 – IRS Standard Deductions

Keep in mind that the deductions in real estate taxes and interest are probably lower than the standard deduction. Always remember that a standard deduction is really a deduction that the IRS (Internal Revenue Service) gives you for free. In the year 2005, the standard deduction by the IRS was $5,000 in single filer cases, $10,000 in joint return cases and $7,300 for household heads.

On the other hand, if you have some itemized deductions and these are lower than the standard deduction that the IRS gives you, then ignore the itemized deductions and take the standard deduction.

However, the standard deduction will not affect you if you are a person with a high income and an adequate amount of charity contributions and itemized deductions in local and state taxes. All these will be higher than the standard deduction and you will not suffer a write-off in your home mortgage.

4 – The Deduction Phase-Out Rule

In the year 2005, a rule known as the Phase-Out Rule took a 3 percent deduction from your itemized deductions if your adjusted gross income (AGI) was more than $145,950. For instance, if you are a person who has $300,000 in adjusted gross income, then you should subtract the sum of $145,950 from your AGI and then multiply the answer by 0.03, which is the 3 percent deduction.

Thanks to these tax benefits, homeownership can be an excellent tax break and you can sell your private residence after some years for a tax-free profit. On the other hand, if you have a spouse, you can make a maximum tax-free sale of $500,000.