Most folks know that there are tax benefits to owning a home in Tehachapi or Kern County as compared to renting. You might be surprised at how much those might be worth. Please remember that you should always consult your tax professional when making major financial decisions. That said, check the list to see where you can save money on taxes by owning a home.
- Mortgage Interest Deduction Probably the most well-known tax deduction related to homeownership. You can deduct the interest paid on up to a $1 million mortgage for your principal or second home. This deduction is most substantial in the early years of a mortgage loan since most of the payment at that time is for interest. As time goes by, you are paying less interest each month and more toward the principal.
- Property Tax Deduction The amount you pay in state and local property taxes can be deducted on your federal income tax return. If you are renter thinking to yourself, “Yeah, but I don’t have to pay those taxes either,” think again. You are paying those taxes, you just don’t see it itemized on your rent bill. You can be sure your landlord has figured out how to get all of his costs covered.
- Deductible homebuying expenses You can also deduct various closing costs ordinarily involved in a home purchase. These include loan origination fees (points), prorated interest on a new loan, and prorated property taxes paid at settlement.
- Home equity loan deduction Homeowners can borrow up to $100,000 against the equity in their home and deduct the interest as an itemized deduction. You can use the money for any purpose, such as paying off high-interest credit card debt. In contrast, the interest on credit card debt is not deductible for individuals.
- $250,000/$500,000 home-sale exclusion The greatest tax benefit of owning a home might come when you sell it at a profit. Homeowners who lived in their home for two of the five years prior to its sale need pay no income tax on a substantial amount of their profit — $250,000 for single homeowners and $500,000 for married homeowners who file jointly. This exclusion can be used once every 24 months.
- 14 days of free rental income Another little known tax benefit of owning a home is that the owner can rent it out for up to 14 days during the year and pay no tax at all on the rental income. In contrast, a renter who sublets his or her rental must pay income tax on all the rental income he or she earns. Thinking about a European vacation for a couple weeks? Rent your house and use the money to help pay for the trip.
What about the tax benefits of renting? Well, there really aren’t any. The only home-related deduction for renters may be for the self-employed or certain employees that use a part of their home regularly and exclusively to conduct business. Oh yeah, you can take that deduction as a homeowner too.
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Have questions? Ready to leave rent behind? You can reach Sally via phone or text at 661-375-7325 (375.REAL) or email Sally@HomeSalesSally.com