When you are considering buying a home vs renting one, did you know that your Uncle wants you to own a home? Which Uncle? Uncle Sam! The government has set up the tax code so that there are significant financial benefits to home ownership, both in the short run (your payments) and when you sell.
How does it work? Your house payment is made up of principal (the amount that goes towards paying down the amount you owe) and interest. Especially in the early years, the bulk of the payment is interest, or in the case of an interest only loan, all of it. The tax code allows you to deduct the interest and property taxes from your gross income to get an adjusted gross. Therefore, if you are in a 32 percent federal tax bracket and a 9.9 percent state tax bracket, you pay 41.9 percent of the last dollars you earn back to the government in taxes. (Note — not all of the dollars you earn, just the upper end!) So if you get to deduct these from income, you also get to save paying the tax on these dollars. A rough rule of thumb to account for the fact that not all these dollars will be in that top bracket is to take about 35 percent of your interest plus taxes and assume that you get that back in a tax refund.
Taking this into consideration, if you had a house payment of $4000 a month including taxes, it would feel to you like a rent payment of $4000 – ($4000 x .035) = $2600. You can either wait and get a big tax refund at the end of the year, or you can file an amended W-4 form and have less deducted from your paycheck each month, thus giving you the additional dollars back right up front so that you can pay the house payment.
Additionally, once you sell, you can deduct $250,000 a year TAX FREE from capital gains if you have lived in the home 2 of the last 5 years and owned it that same amount of time. For a married couple, this means that you could conceivably stash away $500,000 in tax free income every two years. Of course, your home would have had to appreciate by that amount, but in Southern California that is not always impossible to do!
The benefits of real estate are not just for the wealthy — these tax laws were enacted to help the middle class. Why not get your piece of the benefit today? Call us and we’ll be happy to show you more details.