The tax benefits of real estate ownership are something every buyer should understand. When it comes to the tax benefits of renting vs. buying, the benefits of buying are many, while there are few or no benefits for renting.
The tax benefits of buying a home include:
Home mortgage interest deduction: The interest paid on a mortgage or mortgages of up to $1 million for a principal residence and or second home is deductible as an itemized deduction. In the early years of a home loan most of the payments consist of interest, so this deduction is particularly substantial during the first years of homeownership.
Home equity loan deduction: Homeowners can borrow up to $100,000 against the equity in their home and deduct the interest as an itemized deduction. The money can be used for any purpose, such as paying off high-interest credit card debt. In contrast, the interest on credit card debt is not deductible.
Property tax deduction: Homeowners also get to deduct from their federal income taxes the state and local property taxes they pay on their home. This is another itemized deduction that renters don’t get.
Deductible home buying expenses: Various closing costs ordinarily involved in a home purchase are also deductible as itemized deductions, including loan origination fees (points), prorated interest on a new loan and prorated taxes paid at settlement.
$250,000 / $500,000 home sale exclusion: Perhaps the greatest tax benefit of owning a home comes when a person sells it at a profit. Homeowners who lived in their home for two of the prior five years prior to its sale will pay NO income tax on a substantial amount of their profit -- $250,000 for single homeowners and $500,000 for married homeowners who file jointly. This exclusion can be used once every 24 months.
14 days of free rental income: A little known tax benefit of owning a home is that the owner can rent it out for up to 14 days during the year and pay no tax at all on the rental income. In contrast, a renter who sublets their rental must pay income tax on all the rental income he earns.
As you can see, the tax benefits of owning a home are many and almost non-existent for renters. That’s why I love to make the blanket statement “ it’s always better to buy than rent”. Even though I would have to admit it depends on the individual circumstances.
Happy Hunting, Jim Mazzerina