One of the benefits of owning a home is that the IRS and the state government allows you to deduct the mortgage interest and property taxes from your annual income tax return.
There are of course certain limits on the amounts that you can deduct. When you file your federal IRS form 1040, the mortgage interest and property taxes on your home are itemized as deductions on schedule A. On mortgage loans, you may deduct the interest on the 1st 1 million of the debt as well as the property taxes. The IRS also allows you to deduct interest cost on a home equity loan to a maximum of $100,000 borrowed.
Typically, you save on the state taxes as well as the federal. You should calculate the homeownership tax saving by including the state tax savings. However, to keep things simple and still get a reliable estimate, simply multiply your mortgage payment and property taxes by a federal income tax rate. This calculation works well because a small portion of your home loan that isn’t deductible approximately offsets the overlooked estate tax savings.
Once you have totaled what your home should cost on a monthly basis after factoring in the tax benefits of ownership you have a fairly good idea of how much you can afford for your new home.
Don’t forget to include these homeownership costs into your current monthly spending plans to make sure that you can afford to spend a certain amount of money on the homes on and still accomplish your financial goals.
Different Tax Treatment For Home Maintenance and Improvements
The IRS allows you to exclude a certain portion of your profit when you sell your home from taxation that was the result of capital improvement in the home made by you.
It is a good idea for this reasons, to keep a record of the expenditures you make on home improvements. The IRS sales-tax rules also enable qualifying taxpayers to exclude a large portion of their profit from federal taxation, up to $250,000 for single taxpayers and up to $500,000 for married couples filing jointly.
The IRS allows you to exclude the money spent on capital improvements but not the money that you spend as overall regular maintenance of the house.
The difference between the 2 can be very fine at times. For this reason it is a good idea to maintain the receipts of all the improvements and expenditure that you may come home. You can see professional advice as to which expenditure qualifies as improvement and which management in its when it comes to selling the home.
Capital improvements made in the house include things that permanently increase its value and length in its life.
Capital improvements include things like landscaping, adding a deck, installing new appliances [as long as they are left in the home when you sell], installing new air-conditioning system, putting a new roof, remodeling your kitchen, adding a bathroom, adding a new wing etc.
Maintenance and repair costs usually include the cyclical and periodic expenditure that needs to be made in order to keep the home and maintain its usability.
Maintenance costs include fixing up items throughout the home for time to time such as fixing a leaky, painting, lawn maintenance, swimming pool cleaning etc.
Keep a record of all the expense that you make on your home specially if you are not sure as to what qualifies as an maintenance and what qualifies as a capital improvement. This record will come in handy when you need to make the required deductions from your IRS return after selling the house.