Understanding the Tax Implications of Buying a Home
There is no doubt that buying and owning your own home is not only considered part of the American Dream. It is also the cornerstone of your investment portfolio. Hence, it is vital to save for your retirement, and the purchase of a home will appreciate in value, thus boosting your retirement investments. In fact, there is nothing stopping you from buying more than one property, renting them out, and become a full time landlord.
There are different tax laws for a person who owns a single property as well as the real-estate investor who owns multiple properties. In my opinion, its best to get hold of a Tax Consultant for the intricate details on what you may claim and deduct from your taxes and what you must pay to the federal government. However, we can look at the basic rules and regulations to guide you in the right direction.
Property tax versus income tax
As the owner of one or more properties, you are subject to both property taxes as well as either paying tax on certain benefits or claiming back money on other benefits against income tax liability.
In a nutshell, property tax is a “tax assessed on real estate. The tax is usually based on the value of the property (including the land) you own and is often assessed by local or municipal governments.” In other words, property tax has nothing to do with your income and deductibles; it is purely based on the value of your property. It is also used by your local governmental organizations to build new and maintain existing infrastructure such as roads, schools, and water reticulation systems, etc.
It is important to note that different states and local municipalities tax different properties at different rates. Thus, it is not safe to assume that because you pay a certain percentage of the value of your property in one state, you will pay the same amount in any of the other states.
I believe that it is important to note that buying a home can help lower your income tax bill. According to Sally Herigstad of TaxAct.com, “tax breaks for homeownership are a primary motivation for many people to buy their own home.” She goes on to correctly state that to get the maximum tax benefits from your home purchase, it’s critical that you understand the potential tax advantages of buying a residential property.
Income tax considerations when buying a home
Because it is vital that you pay close attention to the ins and outs of the income tax laws when purchasing a home, here is a list of the pertinent considerations that you need to be cognisant of:
Private mortgage insurance premiums are not deductible
Between 2007 and 2014, you were allowed to deduct the monthly insurance premiums that you have to take out in conjunction with a mortgage bond. Unfortunately, Congress declared that 2014 was the last year that you could claim these premiums when preparing your income tax statement.
Interest and property tax parts of your monthly mortgage payments
Your monthly mortgage payment comprises of two parts: capital repayment and interest on the capital amount. Although you may not claim the primary amount on your annual income tax bill, you may claim the interest portion. Furthermore, your home’s financier is required to collect the applicable property tax from you. Thus, you may claim this amount back from tax as well.
The more income tax you pay, the more you will save as a homeowner
It is interesting to note that the more income tax you pay, the higher your salary, the more you can claim back as a homeowner. In a nutshell, you can’t claim back on income tax if you don’t have to earn enough to cover any related tax deductions. For example, if you only pay $500 tax per annum, and your possible homeowner tax breaks are $600 per year, you cannot claim $600 when you only pay in $500. By way of an explanation: these figures are nothing more than an example used to illustrate a point. They are not relevant to a real-life situation.
To get the most allowance for your taxes, please consult a tax consultant or attorney as they are in the best position to tell you what you’re allowed to claim as deductions and which ones are not allowed.
To learn more about home loans, visit fha-info.com.