Tax Benefits of Owning Real Estate
Buy Your Own Home Today and Slash Your Taxes
Did you know that you can reduce your annual taxes by a significant amount by taking out a mortgage loan and buying your own home?
The exact figure of your total tax savings will depend on many factors like your marital status, your tax bracket, the State tax rate, as well as the amount, the duration and the interest rate of the mortgage loan amount, the points you pay, etc.
However, a rough calculation made for illustration purposes will suggest that if you take out a 30-year 6.125 percent interest rate $200,000 loan on a $225,000 property in the State of Maryland, for example, you can reduce your taxes by over $3,000 a year. Please consult your tax advisor to help you figure out your exact tax savings depending on your specific situation.
Here is how you can save on your annual taxes by purchasing real estate, according to the Internal Revenue Service (see IRS Publications 521, 523, 530, 587 and 596):
- Home Mortgage Loan Interest – This is the most significant deduction of all. You can deduct all of the interest you pay on your home mortgage loan (up to $1,000,000) from your income taxes.
- Home Equity Loan Interest – If you take out a loan using your home equity as collateral, then you can deduct the interest on such equity loans up to $100,000.
- Points – A "point" is 1 percent of the total value of your home mortgage loan. Usually mortgage lenders charge 1 to 3 percent as "points." You can deduct all the points -- but not the commission of your mortgage broker. When you refinance your mortgage loan, the points on that refinanced amount is also tax deductible if they are amortized over the whole duration of the loan.
- Home Improvement Loan Interest – If you take out a loan for "capital improvements" on your house you can deduct the interest of that loan from your taxes as well. For a repair work or a construction or renovation to count as a "capital improvement," it has to add to the existing value of the property like an extension, a new floor, a new roof, a deck, swimming pool, etc.
- Home Repair Loan Interest – When you're selling your house, you can deduct the interest of a home improvement loan that you use for all painting, tiling and similar repair jobs around the house.
- Property Taxes – The tax you pay on your property, sometimes also known as "Real Estate Tax," is also deductible. However, if you get a state or city real estate tax refund you cannot deduct that amount from your federal tax as well.
- One-Time Only Capital Gains Exclusion – The Taxpayer Relief Act of 1997 provided another strong incentive why you should own your home today. As married jointly-filing taxpayers, you can keep up to $500,000 of the profit you make from the sale of your "principal residence" totally tax free, provided you have lived for 2 out of the 5 previous years in that property.
- Selling Costs – When you are selling your property, you can deduct from your capital gain (which is taxable) the cost of such items as home inspection fees, newspaper and TV advertisement, title insurance, attorney's fees, realtor's commission, etc.
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