Tax Benefits of Buying a Home and Home-Sale Exclusion Benefits

Great article from Inman News today regarding the tax benefits of buying  a home and the profit protections you receive when you are ready to sell the property.  The big question on everyone’s mind? Should I buy or should I rent?   Prospective buyers should run the numbers and determine the true costs and benefits of renting  a home vs. buying a home.

There are some excellent websites you can refer clients to that have online calculators they can use to compare the costs of renting vs. buying a home.

A good rent vs. buy tool can be found on the Smart Money Magazine website:http://www.smartmoney.com/personal-finance/real-estate/to-rent-or-to-buy-9687/.

Freddie Mac also has a good online calculator:http://www.freddiemac.com/corporate/buyown/english/calcs_tools/.

Here is a summary of the benefits as published in Inman.

Tax Benefits of Buying a Home:

Home mortgage interest deduction: The interest paid on a mortgage or mortgages of up to $1 million for a principal residence and/or second home is deductible as an itemized deduction. In the early years of a home loan most of the payments consist of interest, so this deduction is particularly substantial during the first years of homeownership.

Depending on the state a buyer lives in and his or her tax bracket, this deduction can reduce the cost of borrowing by one-third or more.

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. The money can be used for any purpose, such as paying off high-interest credit card debt. In contract, the interest on credit card debt is not deductible.

Property tax deduction: Homeowners also get to deduct from their federal income taxes the state and local property taxes they pay on their home. This is another itemized deduction that renters don’t get.

Deductible homebuying expenses: Various closing costs ordinarily involved in a home purchase are also deductible as itemized deductions, including loan origination fees (points), prorated interest on a new loan, and prorated property taxes paid at settlement.

$250,000/$500,000 home-sale exclusion: Perhaps the greatest tax benefit of owning a home comes when a person sells it at a profit. Homeowners who lived in their home for two of the prior 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.

Tax benefits of renting:

The only tax benefit that a renter can qualify for by virtue of being a renter is the home office deduction. This is a business deduction available to renters who own a business and have a home office they use regularly and exclusively for business purposes.

Some employees can qualify for this deduction as well. The deduction is limited to the amount of profit earned from the business each year. If a renter pays a lot of rent, this deduction can be substantial. Homeowners who are in business and have a home office can also qualify for the deduction.

Of course, the value of the tax benefits of buying a home depends on the state the buyer lives in and his or her tax bracket. Buyers who live in high tax states like New York or California get the most benefit.

This is why the blanket statement “it’s always better to buy than rent” is not always true. It all depends on the buyer’s individual circumstances.

Thanks for visiting today,

Channing Boucher
Benson Sotheby’s International Realty
Crested Butte Colorado
Visit My Crested Butte Real Estate Guide today.

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