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Tax Benefits
As a property appraiser, Abbe Edelman evaluates a home to determine its fair market value. This is an essential and important step in the process of buying a home. It’s important for the lender as well as for the purchaser. The purchase of a home is one of the largest investments that an individual is likely to ever make. Even though the goal is to get out from under the mortgage eventually, there can be several tax benefits that are available simply because you have a mortgage. If you itemize your taxes there are three major expenses that can be written off: mortgage loan interest, real estate taxes and capital gains if you sell a primary residence. These types of deductions are not available to renters, because the government basically designed them to help encourage home ownership.
Mortgage Loan Interests
This is probably the tax deduction that most are most familiar with. If a homeowner takes some time to study their amortization table they will notice that for the first 10 years or so almost 90% of each payment is interest and not principal. If for example, the house payment was $1300 per month, about $1100 of that would be interest and what is left is divided among insurance, taxes and principal. The most positive thing about this is that the interest paid is tax deductible. The benefit of deducting mortgage interest on the Federal Income Tax Return is that it can lower the overall amount of taxes that you have to pay. This can be a huge benefit and in many cases it can lower a person’s tax bracket which translates to substantial savings.
Real Estate Taxes
Deductions for property taxes are another benefit for homeowners. When a home purchase is made many states require an additional property tax. There are still some states that do not have this requirement but most of the states do assess a property tax on the purchase of property. For those areas that the tax is assessed, it is tax deductible on the federal taxes.
Capital Gains if the Primary Residence is Sold
This can be one of the biggest tax benefits for homeowners. When the primary residence is sold for a profit, it can be yours to keep tax free. The homeowner had to have lived in the residence for at least 2 of the last 5 years to be eligible for this tax break. But if they meet the criteria, a single person can earn up to $250,000 on the sale of their home; and a married couple can earn up to $500,000 on the transaction before they have to pay any capital gain taxes.
PMI Premium Deduction on Mortgages
IF the down payment on a house purchase is less than 20% of the cost of the house you will be required to carry what is called Private Mortgage Insurance (PMI). The buyer purchases this special kind of insurance so that the lender is protected. If the borrower can no longer pay for the loan the PMI premiums can be used on the mortgage. The premiums that are paid for a PMI can be tax deductible. This is true for both the primary residence and a second home if it is not a rental. Initially, this tax break was only valid for 2007 but each year the government has extended it. You are only allowed to deduct the premiums that were paid in the current year. This deduction will start to phase out after the individual’s adjusted gross income (AGI) reaches $100,000. Once the AGE reaches $109,000 the deduction is non-existent.
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