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
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.