Making the move from renting to buying can be unnerving. Potential buyers must begin by asking themselves if it is a good financial move. At first look, it often appears as though renting is a much cheaper option than buying. However, when you take into account the various tax benefits offered by homeownership, this is not always true.
We all know that, over time, you build equity in your home as you pay into it. You are continuing to invest in something that you will ideally profit from one day. But what about the financial benefits in the short-term?
Common Tax Deductible Ownership Expenses:
Mortgage Interest: This can be a considerable deduction, especially in the early years of owning. This is because most loans are structured with greater interest payments at the beginning of the loan term. Your mortgage interest is tax-deductible.
Property Tax: The property taxes you pay on your home each year are fully deductible.
Loan Points: Whether the fee is paid by you or the seller, loan points, also known as origination fees, can be deducted during the tax-year that you purchase your home.
Home Equity Line of Credit/Home Equity Loan Interest: In the event that you end up taking a home equity loan (or home equity line of credit) on your property, you will be able to deduct the interest that you pay on that loan. This deduction is in addition to your deductible mortgage interest.
Private Mortgage Insurance: If you made a down payment of less than 20% when you purchased your home, you will be paying for Private Mortgage Insurance (PMI). Your PMI is fully deductible if your Adjusted Gross Income (AGI) is under $100,000, and your PMI is partially deductible if your AGI is under $109,000.
Tax Benefits Continued…
On top of tax benefits that can be earned from homeownership, owning means that you gain equity in your home. This leads to the price of the home likely appreciating in the long-term. Rent prices will also tend to rise over time, particularly in high-demand markets such as San Diego and Orange County, making home ownership an extremely desirable option.
You will want to consider any added expenses of homeownership, such as homeowner’s insurance, home maintenance, and homeowner’s association (HOA) dues when applicable. With all costs considered, many find that owning a home is still financially advantageous to renting.
Megan Campbell is a Realtor Associate at Class Realty Group in Orange County. Reach her by email at mcampbell@classrealtygroup.com or by phone at 949-943-9011.
