I am not a tax advisor – but I often get questions about the tax advantages of home ownership. The below deductions assume you choose to itemize your deductions instead of taking the standard deduction. Here are the benefits:
- Deduct interest:
When filing your income taxes, you may deduct the interest you pay on your primary residence. You’ll receive a form 1098 which will declare the total interest paid in a calendar year. To get an idea of the interest you will pay annually, take a look at your amortization schedule.
2. Deduct property taxes
You may also deduct your property taxes on your primary residence when filing your income taxes. More info on property taxes is here
3. (Potentially) Deduct mortgage insurance
Provided you meet the income caps – you may be able to deduct mortgage insurance. For single filers, the income cap is $50k and for married filers the cap is $100k. More info on mortgage insurance is here.
Let’s say you are a couple earning $100k and you own a home with a $400k loan at 4%, pay $150/mo in mortgage insurance, and pay $4000 a year in property taxes.
Your deduction from your income taxes will be in the first year of ownership:
$150*12=$1800 in mortgage insurance
$4000 in property taxes
$15,871 in interest, based on a $400k loan at 4% first year’s interest
Total deduction: $1800+$4000+$15,871=$21,671 deducted from income taxes.
If the buyers are in the 28% tax bracket, that $21,671 saves them 28% of that figure in income taxes, which is an annual savings of $6067.88. This replaces the annual savings of just taking the standard deduction which reduces income taxes by $12,600, so the savings would be $3528. The net savings in comparing the two is $6067.88-$3528=$2,539 in the first year, or $211.58/mo.
The interest you pay on your loan will decrease going forward, so the tax savings will decrease as you continue to pay your loan amount down.