Tax Breaks Add Up in Favor of Homeownership

There are many favorable reasons to buy a new home in lieu of renting. Most homeowners will agree that receiving tax advantages is high on the list. Tax benefits will vary widely depending on the circumstances of the individual home buyer, but the main tax breaks are the ability to deduct property taxes and mortgage interest from your income, thus reducing the amount of tax you”ll owe to the IRS at the end of the year.

Mortgage Interest Deductions

One of the most important deductions homeowners can take is on mortgage interest. If you itemize deductions on Schedule A of your federal income tax return, you can generally deduct the qualified interest that you pay on the mortgage of your principal residence. Up to $1 million of acquisition mortgage debt ($500,000 if you’re married and file separately) will qualify for interest deduction. If your mortgage is over $1 million, some of the interest paid on the loan will not be deductible.

Property Tax Deductions

As well as mortgage interest, homeowners can take a deduction on the real estate taxes that were paid on their property in the same year they were paid to the tax authority. Only the actual property owner can deduct the property taxes. Prepaid property taxes can be deducted in the year same year they were prepaid. Funds placed in an escrow account allocated for real estate taxes, but not yet paid to the tax authority, are generally not deductible.

Total Monthly House Payment Calculation Including Tax Deductions

Use the formula below to factor in homeownership tax benefits in your total monthly house payment. You’ll be able to see how much you can actually afford to spend on a new house and still accomplish your remaining financial goals.

• Mortgage Payment: $____
• Property Taxes: (+) $____
• Insurances: (+) $____
• Maintenance and Improvements: (+) $____
• Home-ownership Expenses (pre-tax): (=) $____
• Tax Savings: (-) $____
• Total Homeownership expenses (after-tax benefits): (=) $____

With so many tax benefits given to homeowners, it’s easy to see why buying a new home instead of renting is a smart choice.

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