The Tax Benefits of Buying a Home

There are many tax benefits to buying a home. They are definitely worth keeping in mind if you are a renter considering buying a home for the first time. Such benefits include mortgage interest deductions, property tax deductions, a capital gains tax exclusion, and preferential tax treatment.

In short, tax laws in the United States favor home owners. For instance, if your mortgage balance is smaller than the value of your home, you can fully deduct the mortgage interest applying to your home loan on your tax return. When you make a mortgage payment, interest is often the biggest component. For example, if your monthly payment is $1,200 then you might find that $1,162 is going toward interest while only the remainder of the monthly payment is touching the principal balance. It follows that being able to tax-deduct twelve months of interest is a huge benefit!

As a first time home owner you can also benefit from property tax deductions. Property taxes on your first home are fully deductible for income tax purposes. Also, property tax increases are limited to the lesser of the inflation rate or 2 percent per annum after assessing the value of the home when it's sold.

Home owners can also benefit from a capital gain exclusion. If you have lived in your home for at least two of the past five years then you may exclude profit of up to $500,000 (for couples) or $250,000 (for individuals) from capital gains tax. This exclusion can be used on your taxes every other year or every 24 months. This means you could foreseeable sell your home every two years and make a profit, tax free.

Home owners also receive other kinds of preferential tax treatment when they own a home. Even if you sell your home and receive more profit than the allowable exclusion for capital gains tax purposes, such profit will be considered a capital asset (providing you have been in possession of your home for more than one year). Capital assets receive preferential treatment by the IRS for tax purposes.

In addition to the many tax benefits of home ownership you will build equity when you own a home. The more payments you make, and the more you reduce the outstanding balance of your mortgage, the more equity you will build. Your credit score will also improve due to making monthly payments on time.

So... if you are a renter thinking about buying a home, definitely take the various tax benefits into account, as well as the general benefits of home ownership!