So often a home -- a refuge and shelter; a place to raise a family -- is looked at as an asset. The fact that houses have a strong record of appreciating in worth buttresses that viewpoint. Yet property, especially when serving as a primary residence, has economic advantages well before re-sale time. Taxation policies of the federal, state and local governments can shower favorable effects on home purchasers and owners throughout the duration of habitation. Key to exploiting these savings is awareness of what they are, where they originate and how to go about receiving them from the appropriate sources.
Benefits Upon Purchase
For anyone buying a house for less than one-million dollars, a mortgage interest deduction awaits. At the conclusion of the year of purchase, the lender sends out a 1098 IRS form that totals the interest paid to it during that year. This includes the prepaid interest collected at closing. It also includes any discount points paid at settlement to buy down the rate. Sometimes the points can be deducted in one lump sum the year of the conveyance. In other instances, the amount is calculated annually over the life of the loan. Either way, you save. Those with low equity versus home value who pay for mortgage insurance (PMI) can also deduct the annual premiums.
Benefits During Ownership
Some good things that come with buying continue for the duration. For example, interest can be deducted for the entire term until all you pay is principal. PMI is likewise written off until sufficient equity is accumulated. In addition, property taxes are allowable deductions under Internal Revenue Service rules, though they are capped at $10,000 per year. The lender's statement also indicate this amount should the borrower's taxes be subject to escrow. Otherwise, county or municipal tax bills will reveal this figure.
Per 2018 revisions, interest on home equity loans and home equity lines of credit is also deductible, but with one caveat: use of these funds must be dedicated to home repair and remodeling, i.e. those expenses that directly impact home value. Therefore, using these funds for college tuition, debt consolidation or to throw a wedding -- while permissible -- will not qualify interest on the balance as a deduction. For those working out of the house, the home office deduction is an option. Just make sure business expenses are meticulously itemized. Other deductions are afforded to owners who install energy conservation components, e.g. solar panels.
When the Time for Re-Sale Comes
With few notable exceptions, houses most often gain in value when held for 20 to 30 years. Estimates of appreciation range from three to five percent annually. Capital gains from the sale can be excluded from taxation, in many cases, sometimes as much as $250,000 to $500,000. Usually, any re-conveyance allowing for this is conditioned upon sellers owning and living in the house full-time for at least two of the five years preceding the sale. This is particularly advantageous in a seller's market.
