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Buying a home is a one of the biggest decisions you will make in your lifetime. Therefore it should be well thought out, since it will also be one of the most expensive purchases you will ever make. But, despite the grandiose expenses, there is a positive side, which is the tax advantages give to lessen the cost.
If you plan your home purchase well, in the long term, you will usually end up with a lot more money in your pocket at the end of several years of ownership compared to renting a home. To start, the tax advantages alone will make your home buying efforts worth the cost, as well as accumulated equity. To receive tax deductions for buying a home you must file a 1040 tax form and itemize your deductions on schedule A of form 1040.
The following are tax deductions you can take after buying your home:
REAL ESTATE TAXES
You can deduct annual state and local taxes on your home based on your homes assessed value. You can also deduct real estate taxes included at closing when you buy your home. The real estate taxes paid at closing will include only your prorated portion for the first year you are in the home, the seller deducts the portion included until they were in the home.
HOME MORTGAGE INTEREST
This is the biggie. Most people take out a mortgage to buy a home. For the first couple of years in your home the mortgage payment is mostly interest (unless you choose to voluntarily pay more to your principle). Your mortgage interest is fully deductible. Your mortgage interest deduction will be limited if your home is worth more than $1 million dollars ($500,000 if single), or if you took out the mortgage for reasons other than to buy, build, or improve your home.
POINTS PAID
Points, which are also know as origination fees, maximum loan charges, loan discount, or discount fees are generally deductible. There are some exceptions which your tax person will know, but for most homeowners, especially first time homeowners these charges will be deductible.
SAVE ON CAPITAL GAINS TAXES WHEN YOU SALE
According to the law, married homeowners do not have to pay taxes on up to $500,000 in capital gains realized on the sale of their homes. The $500,000 provision applies to married homeowners filing joint returns and is restricted to homes sold on or after May 7, 1997. There is also a minimum time required for ownership of the home.
IRS PUBLICATIONS TO READ:
Read these IRS publications at the IRS website, before you apply tax information to your home purchase or sale. To obtain these publications, go to www.irs.gov, at the upper right, place the document in the search box; example: "publication 530." The publications are number 530, 936, and 523. Publication 530-Tax Information For First Time Homeowners Publication 936- Home Mortgage Interest Deductions Publication 523- Selling Your Home
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