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Tax Breaks Lure First-time Home Buyers

Shopping for your first home is a mind-numbing experience. Perusing the real estate ads, you are constantly bombarded by six-figure prices. At some point you have to ask, what's in it for me, besides a big down payment and monthly mortgage bills that last for years? Tax deductions, of course, haven't you heard of the tax breaks! Welcome to the world of deductibility. Uncle Sam has designed several tax breaks to make home ownership a little easier to swallow financially.

    Three major items are deductible:

    1 - Mortgage loan interest, including late fees.
    2 - Loan origination or discount fee, or points.
    3 - Property taxes.

Here's what the numbers mean to a hypothetical buyer of a $126,000 home. Let's say you put 5 percent down, that's $6,300, and take out a 30-year loan for the remaining $120,000 at 7.5 percent interest. Your total mortgage interest payments for the first year would be $8,957. Subtract that from your taxable income. Then subtract your property taxes, which vary according to where you live, but will surely add up to at least several hundred dollars. And if you qualify, you could deduct the purchase points, if any, from your first year's return. One point is equal to one percent of the loan, in this case $1,200. These are substantial tax deductions. Just the mortgage interest alone, nearly $9,000, is a hefty tax break.

Remember that only the above items are deductible. You cannot deduct your homeowner insurance, or loan processing fees, or private mortgage insurance.

Naturally, there are more financial considerations to purchasing your first home than just the tax issue. Home ownership also involves a long-term financial commitment, not only to a mortgage loan but to maintenance and repair needs, as well. And your monthly mortgage payments may be higher than rent you're paying now. But with these deductions, your annual tax bill may come down enough to compensate for your higher monthly housing costs. Crunch the numbers. Ideally, you want to reduce the tax withheld from your paycheck and increase your cash flow.

As a renter, you probably enjoy just punching a few numbers every year without worrying about claiming itemized tax deductions or collecting documents to back them up. It may have been simple, but get ready to say goodbye to the good old days of the form 1040-EZ. If you plan to take advantage of allowable homeowner-related deductions, it's probably time to take the leap to itemizing on your tax return.

To determine your bottom line from a tax perspective, see how the total homeowner-related deductions stack up against the standard deduction for non-itemizers. If you qualify for these deductions, and they exceed the 1999 standard deduction of $7,200 for married couples filing together, and $4,300 for single filers, then it pays to itemize and reduce your taxable income by buying your first home.

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