5 Financial Reasons to Invest in a New Home

February 16, 2012

As tax time rolls around it's time to take a good look at the financial and tax benefits associated to owning your own home. We've talked about the recent stabilization of the real estate but still there are those that are reluctant to get off the fence. They continue to rent, paying their landlord's mortgage and passing the following 5 financial benefits along rather than capturing these benefits for personal use. Mortgage Interest Deductions - Homeowners have their own built in tax shelter since tax rates favor home ownership. Upon purchasing a home the way the majority of mortgages are structured, the largest part of your payment is actually interest. This interest is fully deductable on your tax returns, as long as your mortgage balance is smaller than the price of your home. For a comprehensive look at the break down of home mortgage deductions including points, mortgage insurance premiums, and how to deduct interest on your tax returns refer to IRS publication 936. Property Tax Deductions - The majority of homeowners pay some form of local or state property tax based on the assessed value of their real estate holdings. In most cases these taxes are deductible as long as it is on the assessed value, and it is a uniform rate assessed on all property in the jurisdiction. Refer to tax publications for more detailed information. Capital Gain Exclusion - Homeowners who have lived in their homes as a primary residence for a minimum of two of the past five years can take capital gains exclusions upon selling their homes at a profit. If you are an individual you can exclude up to $250,000 and for married couples an exclusion of $500,000 can be taken. In order to qualify for this deduction you do not need to purchase another home, nor are you restricted by age. This type of exclusion can take place once every 24 months so in essence you may make this profit without taxation every two years. Limitations may apply, check the tax codes for more details. Build Equity by Reducing Principal - Unless you are currently on an interest only mortgage each month a portion of your mortgage payment is applied to the principle balance on your loan. With each payment homeowners reduce their interest payment and increase their principal payment hence gaining more equity. However in the early years of the loan much more of the payment goes to interst, and a only a small portion to principal. There are ways to build your equity even quicker and knock off some of the interest paid over the life of the loan. This can include paying extra each month, paying bi-weekly, or paying an extra payment each year. Just one extra payment a year could knock 6-7 years off the life of your loan. Equity Loans - Many credit cards can charge rates as high as 18-24% and the interest paid on these cards is not tax deductible. Homeowners who have built up equity in their home may opt to pay these cards off with a home equity loan, or use a home equity loan for college education, home improvements, medical bills and more. Typically these interest rates are much lower than regular credit lines, and the interest can be tax deductible. Look at IRS Publication 936 for more details. For the full extent of deductions that home ownership can bring it is necessary to itemize your tax returns. But in the end the benefits outweigh the time it will take to complete your taxes. For more information on itemizing your returns to take full advantage of your tax deductions associated with home ownership IRS publication 530 is a great resource. Image source: ©PhotoXpress.com
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