One of the questions raised most often by first-time homebuyers is, “How will owning a home affect my taxes?” While everyone’s tax situation is different, the answer is mostly good news: owning a home is one of the easiest ways to realize tax benefits, and some of those benefits continue for the duration of your mortgage repayment, and beyond!
1. The mortgage interest deduction is the primary way in which homeownership can benefit your bottom line come tax-time. As you may well be aware, this tax rule allows people who pay a mortgage on their primary residence to deduct the full value of that interest from their tax liabilities. Because the monthly mortgage payment in the earliest years after purchase go primarily toward interest (rather than the principle amount owed), this can represent a substantial tax savings across the first years of homeownership.
2. While closing costs are (unfortunately) generally not tax deductible, some aspects of those costs—those associated with your mortgage—may be tax deductible. One of the most common fees that can be tax deductible is any cost associated with the lowering of your mortgage interest rate. The fee may be called a “loan origination fee” or a “discount fee” in your settlement papers; terminology varies from lender to lender. The “Good Faith Estimate” paperwork, which clearly spells out the fees and charges associated with your financing, will include specific information regarding any money you paid to decrease your mortgage interest rate. IRS publication 936 has detailed information on both the mortgage interest deduction, and the “origination fee” or “points” tax deduction. You can also ask your lender for clarification on any terms or fees that you don’t fully understand.
3. Finally, there’s the boon of tax-free gains that you receive when you sell your home. As per current capital gains laws, married couples can make up to $500,000 profit on the sale of their principle residence completely tax-free. Single individuals can receive up to $250,000 profit. This means that Uncle Sam doesn’t touch a dime of your proceeds from the sale of your primary home within these limits—you don’t have to buy more property, you don’t have to invest it, you don’t have to follow any convoluted tax filing procedures. That money, which represents the hard-earned equity you grew in your home, is yours 100 percent!
As always, everyone’s finances are different, so be sure to consult a professional for tax advice to see what applies to your own tax situation. LGI Homes’ preferred lenders are also happy to answer any questions you may have about mortgage terminology and fees, so feel free to stop by our offices any time to learn more about the financial benefits of buying a brand-new house from LGI Homes.