Real Estate Tax Deductions for Dummies… er… future clients :)

It’s Tax Season Yeahhhh!  If you are like me, you totally dread doing taxes because your accountant is going to come back and say you OWE x amount of dollars, please write a big check for me.  If you’re lucky, you may get money back but there is one thing we can agree on; we either want to pay less or we want to get more money back.  The best way to do that with your taxes is by taking advantage of tax breaks that exist out there.  One of the best breaks you can get is by owning real estate.

There are five main ways that you can reduce the taxable income you have through real estThe main ones are through the interest you pay on your mortgage which at the beginning of your loan can be 70-80% of your payment.  You can write the entire years interest off on your taxes.

  1. You take out a line of credit on your house to improve it or take a second mortgage to help pay for the property up front, you can write off all of that interest.  So if you borrow money to put in a pool, you can write off that interest on your taxes.
  2. Property taxes that you have paid to your local government throughout the year for owning a property can be written off as well.
  3. Smaller less deductions that can also be used would include writing off origination fees on a purchase and;
  4. Tax credits are also available for some energy efficient items.  Currently the only one that I think exists is for natural energy such as solar panels you install, a windmill at your house, can get you a 30% write off on the cost.

Now the other big tax advantage is not really a write off, but a benefit and that’s through Capital Gains tax.  So if you don’t know what Capital Gains tax is, basically anything that you own that increases in value whether its artwork, vehicles you own, antiques, things like that.  As those go up in value and you sell them, the Government always wants a piece of that.  With housing, it can actually go up in value and home prices are currently trending this way.  If you are a single person, you are exempt up to $250,000 of increase value for having to pay taxes on that and married couples are exempt up to $500,000.   So if you bought a home for 500k and it goes up in value to a million 30 years later, you are not going to have to pay any tax on that gain when you go to sell it and you can put those funds right into your account.  Now there are some additional terms and conditions for these, which I’m not going to get into here.

So if you are currently renting and you say, well that’s great, but how does that affect me, let me do a really quick example of how owning a house vs. renting can save you money.

Lets say you make $50,000 a year and the average you are going to pay in income taxes is about 30% which equates to $15,000 you are paying in taxes to the government.    You can bring that $50,000 down by doing write offs.

So lets say you are currently paying $1,000 in rent and you decide to find a house that will cost you the same.  You could purchase approximately a $150,000 house at 4.25%(ish) and with property taxes at about $250.00 a month , this would equal about a $1,000 monthly payment.  The interest you pay in the first year is going to be over $6,000 and the $250 in property taxes is going to be $3,000 annually.   These two figures will give you $9,000 worth of write off just by owning a house.

When you write off the $9,000, you subtract it from your $50,000 income and now you have your taxable income at $41,000. So now instead of paying 30% on 50,000, you are paying 30% on 41,000 which equals 12,300.  The difference between that and the $15,000 you would pay without a write off is a $2,700 savings into your pocket.  That’s over $200 savings a month that could be use toward a car purchase, paying your home down faster, take a vacation (or TREO Tip:  Give it to your wife).

Ultimately, you are going to save more by owning vs. renting.  So if you are ready to take advantage of this type of a deduction, reach out to myself or someone on Team TREO, we would love to help you buy a home so when you file your taxes in 2018, you will see HUGE savings!
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