We’ve entered tax season. I, for one, would rather have Round Two of the Holidays. But around this time each year, I often get tax-related questions about owning v. renting a home, and I’m happy to help people make informed home-buying decisions. Potential homebuyers should consider many factors before stepping away from renting and into owning, but on the tax side of things, the answer is easy: owning gives more tax advantages.
1. Mortgage interest deduction
This is the big one. Single tax filers can write off the interest on up to a $500,000 loan, and joint tax filers can write off the interest on a $1 million loan. Joint filers can also deduct the interest they pay on up to $100,000 of home equity debt. In those early years of home-ownership, interest is often the biggest part of your mortgage payments, making this write-off especially helpful.
2. Property tax deduction
King County’s median annual property tax payment comes in at $3,824. Fortunately, you can claim property taxes as a deduction.
3. Points deduction
In essence, points are upfront payment that let you get a better interest rate on a loan. One point is equal to 1% of mortgage loan. (You might have heard points referred to as “loan origination fees” or “discount points.”) You can claim points as a tax deduction, and depending on the circumstance, you can either take a full deduction right away, or you can spread the deduction across the lifespan of your mortgage. A final benefit of points deduction: the first year you buy your home, you can claim a deduction, regardless of whether you or the seller paid the points.
4. PMI deduction
If you didn’t pay twenty percent or more on your home’s down payment, you likely found yourself with PMI (private mortgage insurance). PMI usually ends up around 0.5% to 1% of a mortgage. If your income is under a certain threshold ($54,000 if filing single, $109,000 if filing jointly), you can count PMI as a deduction.
5. The home office deduction
If you’re self-employed and work from home, you can write off some of the cost of maintaining a home office (electricity, water, internet service, etc). This “some” is based on how much living space your office takes up. To qualify for this deduction, though, your home office needs to be a dedicated space reserved for business use only (a desk in your bedroom doesn’t count).
