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Tax Benefits of a Mortgage 2017-01-21T11:21:00-08:00

Tax Benefits of Purchasing a Home with a Mortgage

by Shawn Carvin, Senior Mortgage Banker

Every year, taxpayers look for ways to reduce their federal and state income tax liabilities. Home ownership remains one of the best strategies for saving on taxes, and borrowing the money to pay for your home will allow you to take even more deductions.

Consulting with a CPA or tax professional can help maximize deductions and tax savings. It is important to keep in mind that tax laws are subject to change from year to year, so it’s vital to stay up-to-date on the latest developments. This is just a brief overview of tax benefits for which you could be eligible as a homeowner, and more specifically, if you have a mortgage.

The mortgage interest deduction

tax benefits buying home mortgage - torrance fha mortgage lenderThis deduction allows those who have a loan on their home to reduce their taxable income by an amount equal to the interest that has been paid on the mortgage. In other words, the portion of the borrowers’ income that goes to mortgage interest payments is effectively tax-free. This deduction applies to mortgage interest for a primary home, and in some cases, even a second home.

Based on a typical Los Angeles homeowner’s 30-year mortgage of $600,000 at 4% and a gross household income of $120,000, the tax deduction over the life of a 30-year mortgage would be approximately $125,804. That’s $125,000 of income on which the borrowers will not pay personal income tax!

Plus, interest paid on up to $100,000 in home equity debt may also be deducted, no matter how the borrowed funds are used. Property taxes may also be deducted, when itemized, to reduce taxable income.

Imputed rent

This advantage of home ownership is a little more complicated to understand than the mortgage interest rate deduction, but it’s a significant tax benefit.

It goes something like this – if you rented out to your house to a tenant and charged them just enough to cover your mortgage payment – let’s say $2800 – as a landlord, you would have to pay income tax on the $33,600 you received in annual rent payments.

But when you live in the house, you don’t have to pay income tax on the money that you “pay yourself” to live there, even though you get a similar return on investment that you would have if someone else paid the same amount to live in your house.

Sound confusing? It’s not something you need to spend a lot of time thinking about, because it’s a passive benefit of home ownership. You don’t need to do anything to take advantage of this aspect of the tax code – just enjoy it!

Profits from selling a home

Selling a substantial asset usually results in capital gain taxes. But the federal tax code provides an exemption for homeowners. A gain of up to $250,000 may be excluded from taxable income for single filers and $500,000 for joint filers. In order to qualify the home must have been your primary residence for at least two out of the five preceding years, and you must not have claimed a capital gains exclusion on the sale of another property within the previous two years.

Do you have questions about the tax benefits of a mortgage or about the other financial implications of buying a home? Contact Torrance mortgage lender Shawn Carvin today for a free consultation. Shawn is a licensed California mortgage professional with nearly 30 years experience in the financial services industry, half of that focused on mortgage lending. Shawn works with clients throughout the greater South Bay area including Torrance, the Palos Verdes Peninsula, the Beach Cities, Lomita, San Pedro, and other nearby communities, and points beyond.