Owning real estate has many advantages that can be physically quantified over renting. Equity, monthly cost stability and of course tax benefits. Many people don't realize that real estate possesses a lot of tax benefits which can equate to a healthy return at the end of the year. So, how do you benefit from tax laws when owning real estate?
Mortgage Interest
You often hear that its beneficial to take a mortgage even if you have the cash to buy a house with no mortgage. When you take a loan on real estate you will have to pay the bank interest based on the amount you borrow and the interest rate. One of the great benefits to owning real estate is that you can deduct your mortgage interest from your income each year up to $1,000,000 as a couple or $500,000 filing as a single person. So when does this benefit you? In order to understand that you need to understand the standard deduction vs. the itemized deduction and how to properly leverage your tax bill.
Standard Deduction
The standard deduction has changed from time to time but as of November 2017 the single deduction is $6,350 per year and the couples deduction is $12,700. The standard deduction means that each year you can subtract this amount from your income so at the end of the year you get a tax return. If you are lucky the deduction lowers your into a lower tax bracket so you can get an even larger return. For example, if you make $100,000 as a couple when you file you will show your income at $87,300. Since you will have already paid the taxes on $100,000 you will be owed a return. If deduction lowers you from a 27% tax bracket to a 25% tax bracket you then will be owed a larger amount to make up for those already paid taxes. Every person gets the standard deduction regardless if you rent or own a home.
Itemized Deduction
When you itemize your deduction the assumption is that your itemization will be greater than the standard deduction. When you buy a home with a 10% or 20% down payment and a 30 year fixed rate mortgage, your payments are mostly interest. Meaning if you buy a $400,000 places with a $360,000 mortgage your first year you pay over $14,000 in mortgage interest. You will have beaten the standard deduction which is beneficial to you and you still get the equity associated with home ownership. The itemized deduction limit is up to a mortgage of $1,000,000 which will have interest of almost $40,000 in the first year meaning your end of year tax return will be very large. The key is to make sure that your mortgage interest is greater than the standard deduction and you will be benefiting from the tax benefits of home ownership.
At the end of the day paying more interest can benefit you by putting more money in your pocket and isn't that what it's all about?
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