For most people owning a home means paying more in tax. Property tax for example can add up and is a major expense for many. A home however can also act as a way to save money. Here are a few words about that topic.
You must have heard the words tax shelter before but for most it is usually associated with hiding money in offshore banks. Although many are not aware of it and do not take full advantage of it a home can act as more than just a physical shelter for you and your family, it can act as a good tax shelter too.
The two most known tax benefits when buying a house are mortgage interest deductible and being freed from capital gain tax when selling the house (assuming you lived in it as your main residents for two or more years). Mortgage interest deduction allows you to loan money at a discount (since by deducting the interest you effectively get a cheaper loan). In return the loan money is invested in a real estate assets that proven again and again is one of the best long term investments. Capital gain tax is levied when selling and profiting from capital investments such as a home. If you use your home as your main residents though for two or more years you can sell it and keep the profits to yourself without the need to share them with the IRS. So not only did you get a cheaper loan and money to invest but you also got to put the profits in your pocket tax free.
Both interest rate deduction and capital gain tax benefit have limits. Mortgage interest is deductible for the first and second house and up to one million dollars in mortgage. Capital gain is free of tax for the first $250 thousand dollars profit per individual (in other words married couple can put up to $500 thousands dollars before they have to pay taxes). The reason for those caps is to encourage the economy with most middle class consumers while taxing the rich and luxury homes market.
Another way to invest in your home while squeezing tax benefits from the government is by improving your home. Any work that is done on the home to improve its value for example adding a room is considered an improvement and if you take a loan to finance it you can deduct the loan interest payments.
There are other creative ways in which you can save tax when owning a home. If you are working from home full time or partial time you can allocate a specific area in your home, most likely the garage or basement area, as your home office. If you do that you can be qualified to deduct a portion of your home expenses relative to that area such as electric bills, gas bills, insurance and more.
As always it is best to consult with your accountant before making any financial decisions. Your accountant can explain all the options for saving taxes while owning a home.
Danette Mckay wrote this article. More articles and information on credit