Tax breaks come and go. Some years are good, some not so good. Get ready for a good one! If you purchase a home in 2015, you will be able to take advantage of a healthy package of tax deductions and credits. Of course, to get all the goodies you will have to itemize and keep accurate records.
Think of it this way: would you maintain meticulous tax records if someone agreed to pay you thousands of dollars to do so? Of course you would. That’s why lots of people who have been sitting on the fence will finally take the plunge in 2015 and purchase their first home. Renting is becoming an increasingly unattractive option as nationwide rents rise and the cost of home ownership comes down.
If you are still one of the fence-sitters, consider the following tax advantages of buying a home this year:
The big four tax breaks for those who buy a home in 2015 can be summarized by the acronym, PIPE, which stands for Property taxes, Interest, Points and Energy.
• A part of every mortgage payment goes toward property taxes. Depending upon your city and state where you buy a home, this amount can add up to a significant chunk of change by year’s end. Your lender will break out the amount on your end-of-year statement. For nearly every homeowner, the amount paid in property taxes is fully deductible at tax time.
• If you borrow less than $1 million to purchase a home in 2015, the full amount of your annual interest payment is another juicy deduction at tax time. This one factor is usually enough to coerce most homeowners into itemizing, rather than taking the standard deduction. As well, the ability to deduct mortgage interest is a large part of the reason home ownership almost always makes more financial sense than renting.
• When you purchase a home, you can get a lower interest rate by buying points when you sign for the house. You’ll have to be able to put more money down at signing, but you get two huge advantages for doing so. One, you will have a lower interest rate over the life of the loan. Two, you will be able to deduct the cost of the points on your 2015 taxes.
Considering that each point costs about 1 percent of the loan total and slashes the mortgage rate one-quarter of a percent, this tactic can be a super-effective cost saver. A buyer who purchases four points on a $200,000 home loan would pay an extra $8,000 at signing, but would enjoy a full percentage point reduction on the mortgage’s interest rate. The $8,000 could also be deducted from income at tax time, which means more money in your pocket!
• Energy credits are a powerful tax tool. Unlike deductions from income, credits are amounts that come directly off your final tax bill. The IRS lets homeowners chop their tax bills by up to 30 percent of the amount of investments in renewable energy systems like geothermal heat pumps, solar panels, solar water heaters, fuel-cell property and wind turbines. For most of us, this means we can buy solar roof panels for, say $5,000 and immediately reduce our 2015 tax bill by $1,500 (30 percent of $5,000). Do the math! Energy credits can add up fast, kill your tax bill, and make your home that much closer to being energy-independent. That’s what tax planners call a win-win.
Remember, we’re not tax experts here, nor are we financial advisors, so be absolutely certain to discuss any tax-related advantages of home ownership with your own financial professional before singing on the dotted line. Tax credits and rebates can be tricky, so be sure you qualify for the credit or deduction of your choice by consulting with your tax professional first.
That said, happy house-hunting. May 2015 be the year you discover the advantages, financial and otherwise, of home ownership.