Buying Versus Renting
With the housing market improving in some regions of the country, many people are becoming new homeowners. There are advantages to Owning Real Estate verses Renting.
When Owning Real Estate, there are several tax advantages that a homeowner can deduct from yearly taxes.
A homeowner can deduct many home-related expenses. These tax breaks are available for any type property-- mobile home, single-family residence, town house, or condominium.
Your biggest tax break is reflected in the house payment you make each month since, for most homeowners, the bulk of that check goes toward interest. And all that interest is deductible, unless your loan is more than $1 million. If your mortgaged property is over $1 million, the Internal Revenue Service will limit your deductible interest.
Interest tax breaks don't end with your home's first mortgage. Did you pull out extra cash through refinancing? Or did you decide instead to get a home equity loan or line of credit? Generally, equity debts of $100,000 or less are fully deductible.
What if you're the owner of multiple properties? Mortgage interest on a second home also is fully deductible. In fact, your additional property doesn't have to strictly be a house. It could be a boat or RV, as long as it has cooking, sleeping and bathroom facilities. You can even rent out your second property for part of the year and still take full advantage of the mortgage interest tax deduction as long as you also spend some time there.
But be careful. If you don't vacation at least 14 days at your second property, or more than 10 percent of the number of days that you do rent it out (whichever is longer), the IRS could consider the place a residential rental property and axe your interest deduction.
Points on your loan
Did you pay points to get a better rate on any of your various home loans? They offer a tax break, too. The only issue is exactly when you get to claim them.
The IRS lets you deduct points in the year you paid them if, among other things, the loan is to purchase or build your main home, payment of points is an established business practice in your area and the points were within the usual range. Make sure your loan meets all the qualification requirements so that you can deduct points all at once.
A homeowner who pays points on a refinanced loan is also eligible for this tax break, but in most cases the points must be deducted over the life of the loan. So if you paid $2,000 in points to refinance your mortgage for 30 years, you can deduct $5.56 per monthly payment, or a total of $66.72 if you made 12 payments in one year on the new loan.
The same rule applies to home equity loans or lines of credit. When the loan money is used for work on the house securing the loan, the points are deductible in the year the loan is taken out. But if you use the extra cash for something else, such as buying a car, the point deductions must be parceled out over the equity loan's term.
And points paid on a loan secured by a second home or vacation residence, regardless of how the cash is used, must be amortized over the life of the loan.
Real Estate Property Taxes
Homeowners can also deduct Real Estate Property taxes. Each year, your mortgage company should send you a form that will list the amount of Real Estate Property taxes that were paid and interest on the loan that was paid. This amount is what can be submitted to your CPA or deducted from your income taxes on your yearly tax return.
In order to claim Real Estate deductions, you will be required to itemize your deductions on your tax return.
For more information on what can or cannot be deducted, contact your CPA, tax preparer or visit the IRS at : http://www.irs.gov/