 |
There’s no place like “your” home! Less than 2 percent of Americans actually own their homes independent of a mortgage. Meaning 98 percent of Americans have a “limited” vested interest in their property, sharing ownership rights with the mortgage company. This boils down to one startling statistic. Either your housing payments are being used to pay down “your mortgage”—if you are a homeowner. Or your housing payments are being used to pay down someone “else’s mortgage”—if you are a renter. Given the fact that shelter is one of the basic necessities of life it stands to reason that many of us will have either a long-term or permanent housing expense. One tax strategy that many financial savvy people employ is to convert non-deductible interest expense to deductible interest expense. Housing expenses as a renter are non-deductible whereas housing expenses as a homeowner are deductible. Translation—seek homeownership over renting. It’s the taxable thing to do.
Homeownership represents one of few tax shelters that exist for people who do not have sophisticated income sources. Below, we will detail some tax benefits you can take advantage of as homeowners, homebuyers, and real estate investors.
Mortgage Interest: Subject to certain limits, the interest you pay on a mortgage that is your primary residence or second home is deductible. As long as the mortgage was used to buy, build, or improve your home, interest on mortgages up to $1 million ($500,000 or less if married filling separately) is fully deductible. When you refinance your mortgage, there are certain restrictions on what may be deducted. Generally, you are allowed to deduct interest considered “acquisition indebtedness”. Extra money obtained from the new refinanced mortgage that is not considered “acquisition indebtedness” may be deductible depending on the use of the money.
Home Equity Interest: Interest on home equity loans is deductible up to $100,000. Interest on a loan amount over and above the market value of the property is not deductible.
Points: One point is 1 percent of the loan amount. For example, if you are paying 1 point on a $100,000 mortgage, 1 point equals $1,000. Points are also known as loan origination fees and discount points. Points are considered to be prepaid interest and are deductible. Points are fully deductible in the year that you are purchasing a house. Points are also fully deductible on the amount borrowed for home improvements. The points you pay when you refinance your mortgage are deductible over the term of the new loan.
Real Estate Taxes: Taxes assessed on real estate are deductible.
Prepayment Penalty: Some Mortgage Companies assess a prepayment penalty if the mortgage is paid off early. Prepayment penalty fees are consider prepaid interest and are fully deductible in the year the prepayment penalty is assessed.
Late Fee Charges: Fees assessed for late payment of mortgage is deductible in the year fee was assessed.
Deductible Rental Expenses: Expenses incurred in the process of renting property such as repairs, advertising, janitorial and maid service, utilities, fire and liability insurance, taxes and interest, etc. are deductible.
Depreciation: Real Estate investors are entitled to reduce their tax liability through depreciation or annual deductions to cover cost of certain capital expenditures such as a new roof. Depreciation is a deduction that is realized over a period of time.
Home Office Expenses: A space in your home dedicated as office space can award certain tax deductions.
Capital Gain Exclusion: As long as you meet certain restrictions, you can realized up to $500,000 ($250,000 if single) on the sale of your home and avoid capital gains taxes.
Penalty-Free Distribution: Generally there is an additional tax of 10 percent if you withdraw from a defined benefit plan such as a 401k plan or IRA before the age of 59 ? However, first-time homebuyers can withdraw from such plans penalty free as long as taxpayer uses the money to pay qualified cost for the property.
These are some of the tax advantages associated with homeownership. It is important to note that taking on expenses for the sole purpose of a tax incentive is foolhardy at best. For no tax incentive will award you a sufficient benefit to cover the interest expense. For example, assuming you’re in the 27 percent tax bracket, you take on a deductible interest expense in the amount of $1,000. You reap a tax deduction of $270 but you paid $730 in interest expense. Which would you rather have, a $270 deduction or $1,000? It is however prudent to shift non-deductible interest expense to deductible interest expense.
In closing, while shifting non-deductible interest expense to deductible interest expense in some cases is prudent, the ultimate goal should be to eliminate all debt, including mortgage and become a “True Homeowner”, free of all liens and claims to YOUR HOME!
(Mortgage and Money Coach Damon Carr is owner of ACE Financial. Sign up for Damon’s FREE online “Ask Damon” e-Newsletter at www.allcreditexperts.com. Damon can be reached at 412-856-1183.)
About Post Author
