Despite fluctuating real estate prices, owning your home can still be a smart long-term choice for most families. Here are three reasons why:
- Borrowing the bulk of your purchase price leverages your down payment and lets you profit from gains on borrowed dollars.
- Buying, rather than renting, replaces nondeductible rent with deductible mortgage interest and property taxes.
- You can exclude up to $500,000 of gain from tax when you sell.
For example: You put $20,000 down to buy a $200,000 house. It appreciates 4%, or $8,000, the first year you own it. Stocks appreciate at 10-11% per year, so you’re foolish to “invest in your home, right? Not at all. Your actual investment (your down payment) is just $20,000, and it appreciates by 40%.
Mortgage interest and private mortgage insurance are deductible within these limits:
- You can deduct interest on up to $1 million of “acquisition indebtedness” you use to buy or substantially improve your primary residence and one more home.
- You can deduct interest on up to $1 million of construction loans for 24 months from the start of construction. Interest before and after this period is nondeductible.
- Points you pay to buy or improve your primary residence are deductible if:
- Paying points is established practice in your area;
- Points don’t exceed those generally charged in the area;
- The amount is figured as a percentage of the loan amount;
- Points are specifically itemized as points, loan origination fee, or loan discount fee; and
- Points are paid directly to the lender.
Points that don’t meet these tests, and points you pay on a vacation home, home equity loan, or home equity line of credit, are deductible over the length of the loan. If you sell the home or refinance it with a new lender before you fully deduct your points, you can deduct any remaining balance when you sell or refinance.
If you have any questions regarding the tax break of owning your own home , please do not hesitate to contact us.