For most homebuyers, they know that when they purchase a home it essentially acts as a forced savings plan because a percentage of their payment goes towards paying down the principal amount of their mortgage each month as they build wealth over time.
What about the tax advantages that come with buying a home? In this article, we will break down some of the tax advantages that homeowners enjoy.
Tax Advantages of Buying A Home
Let’s say that you plan on buying a home in Southern California that’s valued at $500,000, and you plan on using $25,000 as your down payment, this means that you’re getting a loan for $475,000.
If your interest rate is 4%, during the first 12 months of paying your principal and interest payments, $8,000 will go towards your principal while $18,000 will go towards paying interest.
Let’s say that you are in the 20% income tax bracket, 20% of $18,000 is roughly $4,500. This is the income tax cash savings (refund) that you could expect to receive when you file your income taxes after living in your home for one year.
Seeing the Bigger Picture of Owning A Home
Yes, owning a home is a great way to provide your family with a great place to live while building wealth over time but the tax incentives of homeownership are certainly a very important aspect of owning a home.
Besides receiving a credit for the amount of money that you paid on the principal of your mortgage loan, you can also deduct up to $10,000 that you paid in property taxes.
In many cases, you may also be able to deduct points that you paid on your mortgage loan (if you paid money directly to the lender).
You could also qualify for more tax credits if you plan on making energy-efficient upgrades to your home.
It’s also possible that you may be able to qualify for tax credits if you plan on staying in your home as you grow older (age in place). Some of the tax credits you could expect to receive include credits for adding a wheelchair ramp to your home or safety features to your bathroom so you can use your bathroom safely as you grow older without fear of falling.