What all taxation benefits do you get if you own your own home? When people say the interest on your mortgage is tax deductible does that mean you subtract the dollar amount of interest you pay so your reported gross income goes down and you may end up in a lower income tax bracket or does it mean that you recieve a tax credit for the value of the interest you are paying on your home? Is there a cap on how high an interest rate or how much in dollar terms you can claim?
What if you have roommates and own your own home, are there any taxation benefits to doing that?
Itemizing deductions, which includes home mortgage interest, means you subtract all those deductions from your gross income. This will very often put you in a lower tax bracket, but even if it doesn’t, you are paying taxes on a smaller amount.
The property taxes you pay are, IIRC, also tax deductible.
These tax breaks go to the owner of the property, who is of course responsible for the payment of the interest and property tax. Who else lives there is irrelevant, whether they’re roommates or family. However, this applies to your own home. The rules for a place you own, don’t live in, and rent out are entirely different.
The mortgage holder sends you a statement each year of the exact amount you paid in interest. The gummint only cares what that statement says and cares not a whit what the interest rate is.
For the record, I’m not a financial planner, lawyer or accountant. These comments represent my own experience as a homeowner and a former landlord.
The interest and property taxes for your principle residence may be itemized. These are often the largest single itemization. For example, let’s say you have a mortgage of $1000 per month, and pay property tax of $200 per month. Also let’s assume you are early into your mortgage and the interest portion of your mortgage payment is $900. The net allowable itemizations from this is: ($900 + 200) x 12, or $13,100. Now this might not be enough for you to actually reach the threshold for itemizing versus taking the standard deduction, based on the your filing rules, but it will probably get you close. Then all other expenses which may be itemized are likely to help from there (the second largest is often state income tax).
If you put the down-payment money and the monthly equity money into other investments, you may (or may not) do better than putting it into a home, compared to renting. Advantages: more liquid assets, easier to move if desired. Disadvantages: easier to squander, and a pile of rent receipts has no value. Choose your bet according to your own ideas.
Signed, home-owner.
PS. If you have paying roommates, you are legally required to report the income to the IRS, but then can depreciate the home, have deductions for maintenance, etc.
PPS. I believe you may now get tax breaks by using tax-deferred savings for a down payment. Someone who actually knows about it needs to post better-founded information on this.
That’s one point. The more important one is the leverage you get in home ownership, assuming a rising market. Say you buy a $200K house, put 10% down, and mortgage the rest, so you owe the bank $180K. Now say the house goes up in value to $230K. You have more than doubled your equity, while not increasing the payments at all. There aren’t many investments where this can happen. This is not an unrealistic scenario - through lucky timing, we’ve over doubled our much larger equity in 8 years.
Two more benefits, besides the tax advantages already mentioned. First, your payments are capped, unlike rents, and in fact you can even reduce them by refinancing when you feel like it. With a fixed mortgage, they never go up, so it is a no-lose situation for you. In California, our property taxes are almost steady (though we pay for this with sucky schools.) Second, the appreciation in your house value is tax-free, not true for capital gains,
You can lose, by buying at the top of a bubble. But in general the tax laws are slanted in favor of home owners.
And, besides those there are a few others- MOST of the Capital Gains (profit) you get from selling your own home (assuming you live there for 5 years or so) is tax free. At least for now.
Then- even if the Estate tax does come back, there is/will be a huge exclusion for your Residence.
Finally- and this is gravy city- sometimes you can get a Mortage Interest credit Certificate. This allows you to directlt deduct- as a Credit- some 20% of your Mortage Interest.
Note however- if you are paying real cheap rent, and the buying market is steep, it can actually be cheaper to rent. Here is Silicon Valley, a modest home is $600K.:eek:
There is a possible problem with buying a Condo- if the rules and the condo board are weird, you can get trapped and not even be able to sell at a decent price. Sometimes the Condo associations rules are more restictive than renting! :mad:
Just to make that a little clearer, capital gains (the difference between the sale price of the house minus the cost of the house) are tax-free up to $250,000 per person, or $500,000 per couple (I believe this applies only to married couples), given that they have used the house as their primary residence for two of the past five years.
You also gain from the non-taxable status of imputed rent. Were you to rent out your property, the rent you received as a landlord would be taxable income. In your own house you are both landlord and tenant, so the rent you pay yourself is an income stream (equal to the benefits of living in the house) that doen’t get taxed.
:mad: