DoorFly.com: Tax Advantages of First Time Home Buyers Explained

What many first time home buyers do not fully understand is how significant the tax advantages can be in buying their first home. The positive affect that home ownership can have on a household’s spendable income can be considerable, especially in the first year following the purchase.

When individuals are weighing the positives and negatives associated with purchasing a home versus renting, it is important that they fully understand these important facts in order to make a well informed decision.

Mortgage Interest Deduction One of the biggest tax advantages of home ownership is the ability to claim the interest paid on your mortgage as an itemized deduction. The majority of your mortgage payment in the first years of your mortgage goes towards interest. For example:

a $200,000.00 thirty year mortgage at 5% interest would provide the homeowner with a tax deduction of $9,932.00 in the first full year of ownership. Almost ten thousand dollars deducted off their taxable income in one year. The homeowner has spent $12,642 of his income on house payments but only the amount paid on principal, $2,710 is actually taxable income. The mortgage company provides a statement at the end of the year that will show the exact amount of interest paid through the house payments they received.

A renter, on the other hand is paying monthly rent payments and paying tax on the income he uses to make those rent payments. If the renter spends the same $12,642 of his income on rent, the full $12,642 will also be taxed.

Points When a buyer buys a home the mortgage lender will generally charge what is referred to as points. Generally these are collected at closing and are often also referred to as your loan application fee. These points are a percentage of interest on your loan value and may also be deducted. Some buyers pay additional points at closing to purchase a lower interest rate. These points can range from a few hundred to several thousands of dollars. Regardless of the amount, these points can also be itemized as a deduction on the buyers tax return for the year of the purchase of the home. A 1099 interest form should be sent to you from the lender at the end of the year in which you purchased your home that will list the amount of the points paid and deductible on your taxes.

Property Taxes In addition to your mortgage payment, a homeowner must also pay property taxes. These property taxes are also deductible as an itemized deduction on your federal tax form. Property taxes can be a fairly large amount annually and should always be taken into consideration when comparing prices on homes.

Other itemized deductions If you have never itemized deductions in previous years, you may find that with the increased deductions provided that there are several tax deductions that can benefit you that hadn’t in the past. If you were claiming the standard deduction, then things like charitable deductions were of no additional benefit to you tax-wise. There may be several items that you didn’t bother to track that you may want to give more attention to once you own a home. It would be wise to educate yourself on the variety of itemized deductions that may be available to you in addition to those directly related to your home purchase.

Special tax breaks Each year the tax laws change and occasionally special tax breaks are given for first time home buyers. Most real estate agents and accountants keep themselves informed of these ‘limited time’ offers and can advise you on what is currently available for your situation.

Home ownership has both positive and negative aspects to it. There are added expenditures and added responsibilities with owning a home. In addition, there are also many benefits to home ownership and the tax advantages is one of them. If you would like to find out more about becoming a first time home buyer we put together a free First Time Home Buyer’s Guide to help you become a more informed buyer.