Still Renting? You’re Missing These Tax Advantages

Mortgages, Taxes
You can trust that we maintain strict editorial integrity in our writing and assessments; however, we receive compensation when you click on links to products from our partners and get approved. Here's how we make money.
iStock_000077389827_Small

By Tom Salomone

Learn more about Tom on NerdWallet’s Ask an Advisor

It’s that time of year when we all sharpen our pencils (or, more accurately, open our laptops) and get ready for tax time. If you were among the millions of first-time homebuyers in 2015, you’re in for a nice surprise this tax season.

Homeownership comes with some impressive tax benefits. Depending on your situation, there may be thousands of dollars coming back your way.

For renters, those benefits are off the table. That’s not to say that renting isn’t a viable option, and it’s true that renters enjoy some benefits that homeowners don’t. But if you’re on the fence about buying a home, these tax advantages might just tip the scales and put your dream home within reach.

The mortgage interest deduction

Homeowners know this is a big one. The mortgage interest deduction lets homeowners deduct the interest on home mortgage loans valued at $1 million or less. This deduction is especially helpful in the first few years of a mortgage, when the monthly payment goes largely toward interest.

Here’s an example: Let’s say you have a $250,000, 30-year, fixed-rate mortgage with a 4.5% interest rate. You’ll pay roughly $11,000 in interest in the first year. Assuming you’re in a 25% income tax bracket, deducting that interest will save about $2,750 in taxes.

The same doesn’t apply to renters, as they don’t have mortgages. Instead, their landlord gets the benefit while the renter helps defray the cost.

Point deductions for homebuyers

Interest rates remain largely favorable for consumers, but there are still options for lowering those rates when you purchase. One is by purchasing what are known as “discount points.”

Typically a “point” costs 1% of the loan amount and results in a lower interest rate that can yield savings over the life of the loan. What many borrowers don’t know is that those points are usually deductible. For example, assuming again that you’re in the 25% income tax bracket, $1,000 spent on a discount point would yield a $250, one-time tax savings (calculated as $1,000 x 0.25).

Property taxes

Everyone knows that being a homeowner means paying taxes on your property to local government, whether that’s the city, county or local school district.

What you might not know is that these taxes are entirely deductible from your federal income tax. That’s good news for homeowners, and it’s another tax advantage that renters don’t enjoy.

Mortgage insurance premium deduction

It’s no secret that affordability is a major issue for prospective homebuyers. Prices continue to rise in markets around the country, while obstacles to saving — such as student loan debt — make it harder to build that down payment.

» MORE: How much home can you afford? Try our affordability calculator

That makes low-down-payment options — available from the Federal Housing Administration and others — attractive, but it’s important to remember that the FHA requires the purchase of mortgage insurance on all loans. And even with a conventional loan, chances are if you put down less than 20%, your lender will require mortgage insurance as well. Mortgage insurance is simply a means for lenders to protect against the risk of a default on the loan, but it means higher costs for the borrower.

The good news? You can deduct mortgage insurance from your federal income taxes as an itemized deduction up to an adjusted gross income of $109,000 ($54,500 if married filing separately), provided other conditions are met. That’s no small thing.

>> MORE: How to find a good buyer’s real estate agent

What about home sellers?

Homebuyers aren’t the only winners. Let’s imagine you bought a home back in 2010 for $250,000 but got a job offer across the country, and now it’s time to make a move.

Maybe you’ve done some home improvements, and the market has improved. Now, a Realtor thinks you can reasonably list your home for $300,000. You follow his or her advice, and boom, you receive and accept an offer for the listing price.

You just put a hefty profit in your pocket, but the benefit doesn’t stop there. Those capital gains are entirely free from federal income tax, up to $250,000 for individuals and $500,000 for joint filers. Is there another investment in your portfolio that can say the same?

What’s right for you?

These are just a few of the tax advantages for which homeowners are eligible. There also are incentives for “greening” a home, depreciation allowances for rental space or a home office, and more.

But it’s important to remember that these aren’t “loopholes.” These tax benefits reflect America’s long-standing belief that homeownership builds and strengthens families, neighborhoods and communities.

Affordable homes can be hard to come by, and tight inventory means competition is stiff. Add on closing costs, insurance, maintenance, a hefty down payment and other challenges, and suddenly it can be daunting. These tax incentives keep the dream of homeownership alive for all creditworthy buyers.

Buying a home is a big decision, and for many people it’s the largest single investment they’ll make throughout their lives. Renting has its perks, and you have to decide for yourself when it’s the right time to buy.

Just know that when you do, there’s help in the tax code to get there.

Tom Salomone is president of the National Association of Realtors.


Image via iStock.