Should You Own or Rent? Remember the Tax Benefits When Deciding
Posted by New Home Resource on August 2, 2017 in
Should I buy a home – or keep renting?
That’s a common question these days, especially since everyone knows the cost of rent has skyrocketed in the years since The Great Recession. So many lost their homes at that time and had no choice but to move into rental properties; but now time has passed and many have gotten back on a little better financial footing. So the question comes up again: “Should I Own or Rent?” Good question.
However, it’s not simply the amount of your Rent Payment vs. a Mortgage Payment – although here in Las Vegas with mortgage interest rates still hovering around the 4% range, that alone can make owning a much more appealing alternative to renting.
That even takes into account the cost of maintaining your own home vs. those maintenance items being a landlord’s responsibility – because in many cases, the principal and interest payment to buy a home can be hundreds of dollars less than renting the same property.
But there are other economic factors that most people forget to consider when deciding between the two: How tax benefits can affect their financial bottom line for the better. Although the tax codes change yearly (so if you have any questions about this topic, be sure to get current information from your accountant), the following have been among the most common IRS deductions for homebuyers in recent years.
Home Mortgage Interest Deduction
Typically, this is one of the largest tax breaks available to homeowners. It allows you to write off the interest paid on your mortgage loan, which can be most lucrative during the first years of your mortgage (when the majority of your payment applies to interest, rather than principal). In some cases, this is even applicable to home equity loans. Certain limits to your loan amount do apply, but most typical first-time buyers fall into this category. When you pay rent – there’s no deduction for that. It’s just money out the door.
Mortgage Points Deduction
If you paid points on your mortgage in order to lower your interest rate, you may also be allowed to write off this expense on your taxes.
Property Tax Deduction
Nevada’s property tax rates fall about mid-range between all U.S. states – and the average American pays in the neighborhood of $2,500/year (just as an estimate). But whatever the property taxes for your home, they are a deductible expense when it comes to your 1040 filing.
Property Mortgage Insurance Deduction
If your mortgage loan includes Private Mortgage Insurance (PMI) – often the case if your down payment is less than 20% – depending on your income, you may be eligible to deduct this expense annually, as well. PMI generally runs between .5%-1% of the amount of your home loan, so this write-off could benefit even more on your taxes.
Tax-Free IRA Withdrawals for First Time Buyers
Saving money for your down payment got a little bit easier when the IRS allowed first-time buyers (or those who haven’t owned a home in two years) to break into their IRA’s for their down payment funds without having to pay the 10% penalty that applies to withdrawals before age 59-1/2. (Although we should note that your 401k plan does not qualify for that same penalty exception.)
The rules for home improvement tax breaks vary often. For example, by taking out a home equity loan to finance major improvements, currently that loan could qualify for the same interest deductions as your main mortgage loan. But there is one important thing to remember: If you document and keep track of the improvements and upgrades you make on your home during the entire time you live there, you can deduct those costs down the road when you sell that home – thus lowering the amount of your Capital Gains Tax.
The ability to take advantage of tax benefits like those listed above really do affect your financial bottom line. Case in point: Consider that if you have a $250,000 mortgage loan at 4% interest, that’s costing you approximately $10,000/year in interest. With just that one deduction, you’ll save money on your annual tax bill. And when you combine the other homeowner tax breaks that could apply to your situation, that’s money that will stay in your pocket (or bank account) – rather than going into your landlord’s.
If you’d like more information about the many other benefits to owning your own home, give our crackerjack team of experienced Realtors® at New Home Resource a call and let’s talk about your specific situation, needs, and goals.
New Home Resource helps current and future homeowners with all of their Las Vegas real estate needs. Whether your preference is for property management, a newly built home from a local builder, or a resale property in just the right location, a New Home Resource Realtor® is here to provide the service you’re looking for. Please contact a New Home Resource Realtor® today at 702-365-1000 or visit www.newhomeresource.com. Broker Joanna Piette, and agents Denise Thrasher, Jessica O’Brien, Evelyn ‘Beng’ Kern, and Kathy Paterniti are all here to help!