Preparing for a Jumbo Loan Application
For those currently renting, they’re probably aware of the major difference between owning a home and paying a mortgage with renting a home and paying rent. Renting is a temporary notion, only updated with a new lease. Each month, the tenant pays the landlord and at the end of the lease the tenant has no interest in the property and only a monthly expense for a place to live. It’s the landlord who gets the advantages of owning rental property, not the tenant. But beyond the obvious fact of ownership versus non-ownership, there are some rather significant tax benefits owners have that renters do not. While it may not necessarily be the case that someone buys a home and takes out a mortgage because of the tax breaks inherent with ownership it certainly makes a difference come tax time. Let’s take a closer look at the tax advantages owners have the renters do not.
The current Administration recently pushed through new legislation that took effect January 1 of this new year. The most common income tax deduction for those who itemize is the mortgage interest paid over the previous calendar year. Each month when a mortgage payment is made, a portion goes toward paying down the balance and a portion toward interest due the lender. Paying down the balance increases the owner’s net worth due to the increase in equity. Paying interest on a mortgage is considered an expense but less so due to the fact that mortgage interest is deductible. Someone that pays $15,000 in interest over the past year gets to deduct that amount from their taxable income. If you’re in the 24% tax bracket that’s a $3,600 bonus.
Another tax advantage relates to what many financial advisers refer to as SALT which stands for the state and local taxes paid. Over the past year, owners pay property taxes to the state and local taxing authorities but also get to deduct these payments from taxable income, reducing their overall income tax burden. If say a couple has paid $12,000 in state and local taxes and they’re in the 24% tax bracket, that’s another $2,880 reduction in taxes owed. Renters don’t get to take advantage of either of these deductions which add up to $6,480 so far. New tax laws limit these deductions to $10,000 per year.
A tax benefit is also awarded home owners who take out an equity loan or home equity line of credit used to remodel or upgrade the home of up to $10,000 per year. This is a new change for 2018. Prior to 2018, home owners could deduct interest from an equity loan or home equity line of credit if the funds were used for any purpose. Going forward, interest can only be deducted if the loan proceeds were used for home repairs, remodels or upgrades.
We know that home ownership may not be for everyone. Some people simply prefer to rent and leave the maintenance and upkeep to the landlord. And that’s certainly okay. But for those who are thinking about becoming a home owner, there are some real benefits that will be felt as income tax time approaches.