The Star Advertiser reports, according to a National Association of Realtors survey, homeowners rank the desire for tax incentives as an important reason to buy real estate. After all, tax deductions translate to more money in their pocket, and in an economy where pay cuts and jobs lost have reduced the amount of money to live on, every dollar sheltered is a dollar earned.
Because tax issues are some of the most commonly overlooked benefits of home ownership, it pays to know what deductions are available. Tax savings related to owning a home can add up to roughly one-third of your mortgage payment. So, whether you’re gathering your information to file, or you’re considering buying a house in 2011, keep this list handy.
1. Mortgage Interest
A substantial portion of your mortgage payment, especially in the early years, goes to paying interest rather than principal. And home mortgage interest payments are tax deductible, up to $1 million in mortgage debt for as long as you have a mortgage.
“The interest you pay on a loan, including first mortgages and equity lines of credit, are the biggest homeowner deduction,” says Wes Young, senior vice president at First Hawaiian Bank.
2. Real Property Taxes
Property taxes are fully deductible, as long as the tax is based on the assessed value of the real property.
Points charged by a lender to buy down your interest rate are a deductible expense.
“The more points you pay, the lower your interest rate,” says Young. “If this is going to be your primary residence, we recommend you pay the points and get the rate down.”
When you buy a home, you can typically deduct the full amount of the points paid at closing, according to Young, but if you pay points to refinance, you must amortize the points over the life of the loan. The unamortized portion can be deducted when the loan is paid in full, when you itemize, he adds.
4. Capital Gains
The Tax Relief Act of 1997 stipulates homeowners do not have to pay capital gains tax on profits made from the sale of an owner-occupied home up to $250,000 for a single person or $500,000 per couple.
“For example, let’s say you sell your home for $750,000 and you had originally purchased the home for $250,000,” says Young. “You’re entitled to keep the $500,000 profit tax free. Some restrictions apply, such as you have to have lived in the home for two of the last five years, but there are no restrictions on how many times you can do it. As long as you’re a homeowner, you can use this exemption each time you sell.”
5. Mortgage Credit Certificate (MCC) Program
A lesser-known tax credit available to those who qualify is the Mortgage Credit Certificate Program. Under this program, homebuyers who meet household income and purchase price limits can qualify for a federal income tax credit equal to 20 percent of their annual mortgage interest – which can add up to savings of thousands of dollars each year.
“Let’s say you have a loan amount of $300,000 with an interest rate of 4.75 percent for 30 years,” says Young. “Your principal and interest payment would be $1,564.94 and your total interest for the year adds up to $14,150. Under the MCC, 20 percent of that, or $2,830, is a tax credit, which means you can take what you owe the IRS and subtract $2,830. And you can do that every year!”
The remaining 80 percent of your annual mortgage interest will continue to qualify as an itemized tax deduction (number 1 on this list).
MCC loans are available only through participating lenders and First Hawaiian Bank currently has funds available for this program. As with all of these tax issues, Young recommends consulting with a tax adviser for details.