3 Common Tax Benefits of Homeownership

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tax benefits of homeownership

tax benefits of homeownershipAre you considering buying a home, but wonder if the investment will pay off in the long-term? Do the tax benefits of homeownership make it worthwhile?

Buying a home is likely one of the largest financial investments you’ll ever make, but when entered into thoughtfully, can be an excellent investment into your future.

Why Owning a Home Builds Wealth

It’s common advice that owning a home is smarter, and more economical, than throwing away your money while renting. Homeownership can be a financially savvy choice, if you’re able to view it as a forced savings plan or long-term investment.

You won’t make your money back over night, but each month, as your principal balance decreases and your home’s value increases, you’re building up valuable equity in your home.

Over the long-term, buying a home can be cheaper than renting, because you’re not putting all that money into someone else’s pocket. You’re putting it towards personalizing your space, making it your own, and are able to take advantage of these common tax benefits.

  1. Mortgage Payment Deduction

When filing season rolls around, homeowners can deduct the mortgage interest paid, using Schedule A on their personal tax return. This can be an especially large tax deduction during the first few years of homeownership, when the interest-to-principal ratio is much higher.

At the end of the year, you’ll receive a Mortgage Interest Statement (or Form 1098) from the mortgage company who holds the loan, listing the amount of interest paid.

  1. Property Tax Deduction

Any real estate property taxes paid, on both your primary residence or a vacation home, is fully tax-deductible. This includes payments made to your local Tax Assessor, or through an escrow account with your mortgage company.

The Form 1098 you received from the mortgage lender, or the company controlling your escrow account, will have this figure in a separate box or on a separate breakdown statement from. You can also call the local tax office to obtain a copy of the total real estate property taxes paid for the current year.

  1. Capital Gains Exclusion

Although a home should be viewed as a long-term investment, if you decide to sell your primary residence after owning it for more than two years, you’ll qualify for a capital gains exclusion on any profit, up to $500,000 (if you’re married).

In other words, if you’ve built up a good amount of equity in your home over the past several years, you can sell it for a large profit and not have to pay any ordinary income tax the income. Going back to our first point, it’s like a forced savings plan that comes with a large return on investment in a relatively short amount of time.

When compared to other long-term investments, the tax benefits to homeownership push the argument over the edge on whether or not you should buy a home.