Goodspeed: Tax advantages for buying a home
QUESTION: What are some of the tax advantages of home ownership?
ANSWER: There are several tax advantages to owning a home. Chief among these is the mortgage interest tax deduction.
As a homeowner, you will be able to deduct mortgage interest (which is going to be most of your monthly mortgage payment initially) on your federal tax return. You can also deduct points and the real estate taxes you pay on the home.
Between these two deductions, mortgage interest and real estate taxes, most of your monthly shelter costs as a homeowner are going to be tax deductible.
If you borrow against the equity in your home to take out a home equity line of credit (heloc) or second mortgage and use the proceeds to make improvements to the home, you will also be able to deduct the interest on the loan on your federal tax return - providing your total mortgage debt does not exceed $750,000.
Although the mortgage interest tax deduction will shrink a bit each year as more of your monthly mortgage payment goes toward principal, these tax advantages last for several years. And when you sell your home, any gain or profit you make on the sale up to $250,000 ($500,000 for married couples) is tax-free as long as you have lived in the home as your primary residence for two out of the last five years.
QUESTION: I want to start looking for a home in the next year, but my husband keeps saying we need to save more for a down payment. He wants to be able to put down 20 percent so we don’t need to purchase private mortgage insurance. He says paying PMI is just throwing money down the drain that he doesn’t want to do. Any thoughts?
ANSWER: I agree with your husband that paying private mortgage insurance is a drag. But one big mistake many first time homebuyers make is draining their savings on a down payment and closing costs. It is more important to have a three-to-six-month rainy day fund at the end of the process.
Waiting a bit to purchase a home in order to save more for a down payment is a good idea, but don’t sit too long on the sidelines. Interest rates are attractive and inventory is growing.
Put down as large a down payment as you can without emptying your bank account. Paying mortgage insurance is not ideal, but if it leaves you with a rainy day fund, it’s OK.
Linda Goodspeed is a longtime real estate writer and author of “In and out of Darkness.” Email her at: email@example.com.