The Tax Benefits of Becoming a Homeowner

Becoming a homeowner is a big part of the American dream. Finding a home to call your own is something that many people look forward to for many reasons. The pride of ownership, the freedom from a landlord, and the ability to do what you want with the property are just a few things that you can look forward to. However, the tax benefits associated with becoming a homeowner are perhaps the biggest reason to buy a house. Many people do not fully understand all of the advantages that the government has given homeowners. Here are a few things to think about.

Origination Fees

The first thing that you will be able to deduct are some costs associated with purchasing the home. On your mortgage paperwork, you will most likely see a line item for "daily interest." This is like a prorated amount of interest that you pay if you close your loan on any day after the first of the month. You can deduct this amount straight from your taxes.

In addition to that, you can deduct any origination fees and discount points that you pay on the loan. Even if you don't pay them, you can still deduct them on your taxes. This can amount to a few thousand dollars right off the bat that you are able to deduct. The more points that you pay, the more you can deduct on your taxes at the end of the year.

Mortgage Interest

One huge tax advantage that homeowners are presented with is the ability to deduct mortgage interest. You might not think that this amounts to much, but at the beginning of your loan it does. The vast majority of your loan payment is interest. If your payment was $1000, you might be paying $950 in interest. Therefore, during the initial stages of your loan, this can add up to be a very large deduction over the course of a year's worth of payments. It is because of this fact that homeowners typically receive the biggest income tax refunds around tax time. If you are self-employed, it means that you will have to come up with less money on April 15th. This deduction also counts for home-equity loans as well. Therefore, you can take advantage of deducting interest even when your mortgage is paid down.

Capital Gains Tax

Perhaps the largest tax benefit of owning a home comes when you sell the property. When you have lived in a house for a number of years, you have undoubtedly built up some equity in the property. When you sell the property, you will generally realize some sort of profit. With the benefits that the government has given homeowners, in most cases, you will not have to pay taxes on this amount. As long as you have lived in the house as your primary residence for at least two out of the last five years, you will not pay a cent in capital gains taxes. This can amount to a huge amount of tax-free dollars at your disposal.