Uncle Sam Wants YOU
To Buy A Home!
The Federal Government Is Offering A Reward
To Americans For Buying A Home
Having Americans own their own homes is something that the federal government feels is good for American culture and good for the American economy. Consequently, the government encourages and subsidizes homeownership by offering a variety of generous tax incentives.
More than 75 years ago, the U.S. government began incentivizing homeownership by permitting home loan interest (interest paid on a home mortgage) to be deducted from personal taxable income. That deduction still exists, and most states have income taxes codes that offer the same deduction.
Since then however, many more lucrative incentives have been added to the IRS tax code to further encourage and subsidize homeownership.
The Triple Play Of Generous Tax Breaks For Homeowners
Play #1: Tax Benefits - When You Buy
The IRS says you can deduct mortgage interest in the year that it is paid. While interest is usually a portion of the monthly loan payment, there is one "extra interest payment" that is often paid on the day you buy the home. On the day of closing, (if your purchase is on any day other than the first of the month), you will likely be charged "per diem interest" between the day of closing and the end of the month. (The amount will be on line 901 of your HUD-1 settlement statement.) This extra interest payment is deductible from your taxable income for that year.
In addition, loan discount points and origination fees (which are basically prepaid interest) are tax deductible to the buyer, regardless of who pays them. These amounts will appear on lines 801 and 802 of your HUD-1 settlement statement. If you happen to have negotiated a purchase agreement whereby the seller agrees to "pay your closing costs", you (the buyer) will get the tax deduction for the origination fee and/or points even though the seller made the payment. Origination fees and points are typically 1% of the loan amount (or more) so this tax deduction can prove to be quite a big chunk of cash.
At the end of the first year of owning a home, make sure that the 1098 you receive from your lender includes the pro-rated interest paid on the day of the closing.
Play #2: Tax Benefits - While You Own
In general, you can deduct interest charged on a loan used to acquire or improve your principal residence in the year that it is paid. In the early years of a loan, most of your monthly payment is interest, so this can really add up. If you are in a 28% federal tax bracket, this can have the effect of lowering your borrowing costs by almost a third.
In addition, all property taxes you pay on your home are completely deductible, (but special government fees such as water or sewer assessment may not be).
Plus, you can deduct interest on an extra $100,000 of mortgage debt, which can be used for any purpose. This is called the "Home Equity Loan" exception, and it allows you to tap into your home equity for any purpose. This gives home owners the ability to do what is called "debt-shifting." For example, if you live in an apartment and have a credit card balance of $10,000 at 18% interest, none of that interest would be deductible. But if you bought a house, obtained a home equity loan for $10,000 and paid off the credit card, then ALL of the interest expense becomes automatically deductible. Furthermore, the rate on the home equity loan is likely to be around prime plus one or two, usually much lower than credit card rates. This same technique works with any and all personal debt, from car loans to consolidation loans - with only one hitch. In every home equity loan, you have pledged your house as collateral for the loan. If you fail to pay the payments as agreed, you could lose your house to foreclosure. So be careful in using this technique.
Play #3: Tax Benefits - When You Sell
This is the real "icing on the cake". As incredible as it may sound, you can sell your home at a huge profit and NOT pay a dime in federal taxes on the profit. Here's how it works:
If you have owned and occupied your principal residence for at least two of the past five years, you are permitted to earn up to $500,000 in profit (gain) on the sale of that house and pay no federal income tax whatsoever. That's assuming you are married ... unmarried homeowners are eligible for a maximum of $250,000 in profit (gain) ... completely free of federal income tax.
But Wait! That's Not All! You can do this, as often as, every two years for the rest of your life. And under certain circumstances, there are even provisions for a partial exclusion if you have lived in the home for less than two years.
For more information regarding this incredible Capital Gains Tax Exclusion & The Sale Of Your Home,
READ - "Your Home Is Giant Municipal Bond With A Roof"
In general, what is deductible?
In general what is NOT deductible?
Everyone has to pay for housing. The difference is that, if you're a tenant, you're paying your housing costs with "take home pay" and if you're a home owner, a significant portion of your housing expense is paid for with "gross pay". In other words, if you are a home owner, the government, (by allowing these incredibly generous tax deductions), is essentially paying a major portion of your housing costs.
Dorothy (from the Wizard of Oz) was right. "There's no place like home." So what are you waiting for? Buy a home NOW!
Note: This article is not intended as legal or accounting advice.
Before making any decisions, seek the advice of an attorney and/or accountant.
© Copyright 2007 Bill Boeckelman Publications