There are so many things to consider when thinking about purchasing a home. You have to think about what you can afford, you have to get approved for a loan (not pre-approved), you have to find the home, and then you have to pay. Many individuals, especially first-time homebuyers, do not consider the tax implications of purchasing a home and believe it; there are tax implications.
The mortgage points deduction
Not too many people think about this one or even know about it. A mortgage point (also referred to as a discount point) is basically an amount of money you pay the mortgage lender to reduce your interest rate. You pay this at closing. Typically, a mortgage point is equal in value to 1% of your mortgage amount.
If you meet certain criteria, you can deduct the money used to buy mortgage points but only during the year in which the transaction occurred.
The deduction of mortgage interest
Perhaps the most popular deduction for home buyers, this benefit allows you to deduct interest paid on up to $750,000 of mortgage debt. If you file your taxes online, this is a standard question, and it is very easy to claim the deduction. Certain restrictions apply based on the type of mortgage you have.
Home office deduction
If you are a small business owner and have a home office, you can claim the home office deduction. To figure out what the deduction is, calculate the square footage of the home office and divide it by the square footage of the house. This gives you the percentage you will use to calculate the deduction when doing your taxes. You can apply the percentage to certain housing expenses. For example, if your home is 1000 sq. feet and your home office is 200 sq. feet, you can apply a 20% deduction to the years housing expenses such as:
- Cell phone
- And more
Keep in mind that the home office must be used exclusively for business. Also, this is one of the top causes of an IRS audit, so do not fudge the numbers!
A tax-free asset when the time comes
Most people do not live in the first home they buy for the rest of their life, so a home sale is inevitable. If you live in the home for at least two of the five years preceding the sale of the home, you do not have to pay capital gains tax when you sell. This is a HUGE money-saving and wealth-building tool. There are very few money-generating assets that can be sold without getting slammed with capital gains tax.
A special IRA consideration
This is not necessarily directly related to the tax benefits of buying a home, but it is considerable. You can withdraw up to $10,000 from your IRA for the purpose of a down payment on a house, and you do not have to pay the 10% early withdrawal fee.
A house is not always a blessing. Sometimes unforeseen circumstances make your home a burden. If you are facing foreclosure or you are considering bankruptcy because you cannot afford your home, you need help. Dsouza and Strachan Legal Group has the knowledge and experience to save your home or get you on the path to financial freedom. Contact Dsouza and Strachan Legal Group today for a free consultation.