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By Martin H. Bosworth
Homeownership continues to epitomize the American Dream because homeownership gives you more than a home. It gives you shelter. Shelter from a landlord’s whims and life’s many storms. But your home also provides another benefit: a tax shelter.
Mortgage Interest
After you close escrow and lay fresh sod in the front lawn, you may anticipate April showers. But you can receive another April windfall when you file your federal taxes: The Internal Revenue Service (IRS) enables you to deduct the interest from a first-time home purchase or home equity loan in the year the loan is made.
Need more shelter? Some homeowners are consolidating credit debt via a home equity loan. The reason is that the interest from the home equity loan is tax deductible, but the interest paid on credit card debt is not.
You also can deduct the interest on any purchase or improvement for your first or second home from your tax return. The IRS allows you to deduct the interest paid on mortgage debt up to $1 million, provided that your home is the collateral used to secure the loan.
Property Taxes
No one likes paying property taxes on their home but, again, they can have their upside at tax time—you can deduct state and local property taxes from your federal return in the year that they were paid. If you bought a home in California in 2006 at the-then median price of $556,640, your property taxes would be $5,570 for the year, and are fully deductible. Property taxes are assigned based on the value of your residence, so if your residence’s value goes up, so do your taxes—and so does the total amount you can deduct each year.2
Return on Investment
Let’s say you bought a home for the overall 2006 median price of $556,640. Assuming you made a 20 percent down payment at the-then current interest rates, your interest for the first year would be $28,400, for a total deduction of $33,960 (including property taxes). If you fall in the 25 percent tax bracket, your savings for that year would be $8,490. Not bad, eh?
Consult with your REALTOR® and your accountant to learn more about how your home can provide multiple tax and investment benefits.3
• FAQs
To learn more about the IRS guidelines regarding mortgage interest deductions, visit www.irs.gov/pub/irs-pdf/p936.pdf.
• Not Allowable
Sorry, your homeowners’ association fees are not tax deductible.
• PMI Deductions
If you’re paying PMI insurance and your adjusted gross income is $100,000 or less, a new tax deduction in 2007 allows you to deduct the full amount from your federal taxes. If your adjusted gross income is greater than $100,000 but less than $109,000, you qualify for a reduced deduction.
Footnotes:
1. Adams, John. “Tax Benefits of Home Ownership Are Almost Too Good To Be True,” REALTOR.com. http://new.realtor.com/Basics/Buy/ClosePossess/TaxBenefits.asp?poe=realtor&source=ig.
2. “Appreciate Your Appreciation,” California Real Estate magazine, April 7, 2007. www.car.org/index.php?id=MzU0Nzg.
3. Klein, Kevin. “2006 Income Tax Time—Benefits of Home Ownership,” Orange County Real Estate. www.klein4realestate.com/real-estate-economic-forecast/ 2006-income-tax-time-benefits-of-homeownership-car.htm.
Source: California Association of REALTORS®
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