If you are currently renting and thinking about the possibility of buying a home, the potential tax deductions are one of the great benefits of being a home owner. When you own a home, you are able to deduct a large amount of your expenses from your gross income when filing your taxes. As a homeowner, you are able to deduct the following when filing your taxes:
Mortgage Interest
Real Estate Property Taxes
Discount Points
Private Mortgage Insurance Premiums
Home Equity Loan Interest
Home Improvement Loan Interest
For example, if you buy a $500,000 house with a 20% down payment and a 30 year fixed mortgage at 3.5%, you would pay close to $14,000 in interest over your first year. In addition to that, you would pay roughly, $5,000 in Virginia real estate property taxes (~1% of the home value).
So over that first year, you could deduct $19,000 from your gross income! To make things easy, let’s say you are in the 25% tax bracket. By owning a home, you just saved $4,750 in taxes! It is important to note, if you co-own the property with a partner and file your taxes separately, only one of you can deduct the mortgage interest and property taxes from your income.
In addition to mortgage interest and property taxes, you can deduct the interest on a home equity loan or line of credit that is up to $100,000. You also can deduct money spent on discount points to lower the interest rate of the mortgage when you purchased the home.
If you are unable to put 20% down when you buy your home, it is typical for the lender to require you to have private mortgage insurance. As a homeowner, you can deduct those premiums as interest when filing your taxes. However, once your income rises above $100,000, the amount you can deduct reduces and once you make more than $109,000 per year, you are no longer able to deduct your private mortgage insurance premiums. Lastly, if you take out a loan to perform home improvements like a kitchen renovation, you can deduct the interest of that loan from your income.
So in recap, as a homeowner you can deduct your real estate property taxes, mortgage interest, discount points, home equity loan interest, and home improvement loan interest. For more great tips about owning a home, visit the pages in the Live section of our website.