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What Are The Tax Advantages Of Home Ownership?

What Are The Tax Advantages Of Home Ownership?

Owning a home can give you considerable tax advantages. Homeowners pay local property taxes and interest on their mortgage. A renter pays rent. The landlord however can use the money the renter pays to pay the interest on the mortgage so in a indirect way the renter pays this. The homeowner or landlord has a distinct advantage over the person that pays rent. If the landlords income, exemptions, and other deductions are the same as his renter the landlord will pay less taxes so you can see there is a distinct advantage to being a homeowner or in owning rental property.

The homeowner will be allowed to deduct from his income when paying interest on a mortgage or paying property taxes. While rent of course can not ever be deducted. Let me give you an example of how this works. You can have two childless couples whose income and circumstances are identical except one couple rents a house and the other couple owns their house. And while both couples have identical incomes, and deductions the one that owns their house will have further deductions available to them in the amount of $1.920 due to their interest payments and property tax payment. The couple that is buying their home will get to take a total deduction of $2.640 while the couple renting can only take a deduction of $1.500. Believe it or not but the couple who own their home will pay $217.00 less than the couple who rents. As a homeowner you can pass part of your property tax and interest payments on to good old Uncle Sam.

And even when the homeowner pays off their mortgage and even if they live in a community with no property tax they will still receive favorable tax treatment because of the imputed rent income which is paid but they pay no taxes on. Again let me show you an example. Lets say you have two people that both work on the same assembly line for the ABC Assembly Company each making a $30,000 a year income. Now both of these people own their own home but Mr Crane lives in his home while Mr Black rents his home and lives with his relatives. Now both of them have a $50,000 house free and clear. Mr Black has a net cash rental income of $1,000.00 after all expenses including his property taxes. He will have to pay taxes on $51.000. Mr Crane should look on his cost free living as being worth $1,000.00 which is really income in kind. If these two were to be treated equally they should both pay taxes on either $50,000 or $51,000. But in truth Mr Crane pays on $51,000 and Mr Black on $50,000. The same thing would apply if Mr Crane were to invest his savings in his house while Mr Black invested in high grade municipal bonds. After a time Mr Black would have interest income which is taxable while Mr Cranes rent income received in kind would not be.

Some people can depreciate part of their houses value for tax purposes. If a homeowner uses part of their home for a home business then they can deduct the portion of the over all costs used for that portion of the house where the business is located. For example if one half of the house is used for business then one half of the total expenses can be deducted. The same would be true if the homeowner were to rent one half of their house to someone.

Image by: Photo Dean