Home loans: Tax Advantages of Buying a Home

Real estate taxes and mortgage interests have tax advantages and these benefits can be enjoyed by any one with a mortgage. Taxes are complicated business and hence information regarding benefits, drawbacks and filing tax returns should be procured completely.  Tax benefits can be enjoyed in two ways. We can either wait for the big pay off once the tax returns have been filed or accommodate and adjust the amount that is deducted from the monthly paycheck.

Mortgage payments require monthly repayments that have to be done. A new mortgage would see the monthly payments directed towards the repayment of interest and the capital remains the same. Thus tax benefits are a great help during these initial months. Over a longer time frame, more of the monthly repayments are directed towards repayment of principle and lesser amount goes to the interest. Thus with time as equity in the property increases interest write off is lost.

Tax deductions can be availed if the borrower shifts from standard deductions to itemized deductions. If the itemized deductions including interest on home mortgage and property taxes are less than standard deductions then it is wiser to stick on with it. There are three components of a home mortgage that are tax deductible. These include interest on the home mortgage, property taxes and loan points which is completely deductible in the year of purchase. For refinances the loan points are written off as increments over the home mortgage term.

There are components in the mortgage which are not tax deductible like home improvement expenses; insurance; fees for home inspections and loan application; commission paid to the real estate loan brokers and other dues and costs associated with the procurement of home loan. Most of the penalties come from IRAs. Conventional IRA account and 401-K plan cannot be used for down payment on loans. In the event, high penalties and taxes are levied on the gains that accumulated when it was in your savings. The ideal thing to do is to use Roth IRA. These are specifically created for first time home buyers by The Taxpayer Relief Act of 1997. This Act allows withdrawal for first time home buyers without any penalties.

There are other factors that have to be taken into consideration like firstly, according to the tax law, if monthly income is less than hundred thousand dollars, then existing IRA can be converted into a Roth IRA. There is a wait of five years for qualifying for Roth IRA. A distribution has to be made after five taxable years from the first payment to the account is made. Secondly, contributions made to Roth IRA are not tax deductible. But there is no need to pay taxes on distributions. Four thousand dollar is the limit of contribution that is allowed. This is valid for single tax filers with an adjusted income less than $95,000 and joint tax filers with combined income of $150,000.

Thus taking a mortgage has tax benefits that can be enjoyed. These benefits are to encourage people to go for a home and thereby contribute towards the welfare of the economy and society.