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Why Buying a Home is a Good Idea
They say there are only two things you can count on in this world; death and taxes. But due to income tax deductions, the government subsidizes a portion of the purchase of the home. When buying your own personal residence, many of the expenses are not tax deductible, but there are a few worth noting. The IRS allows you to deduct 100% of the loan interest and property taxes in the year that it is paid from your gross income to reduce your taxable income.
For example, say you assume a 30 year amortized loan for $200,000 at 8%. The interest payments during your first year would be approximately $15,936. If your gross income was $50,000, your taxable income now becomes $34,064. So this can really add up. If you are in a 28% federal tax bracket, this can have the effect of lowering your borrowing costs by almost a third, depending on which state you live in.
Additionally, the IRS says that in most cases, loan discount points and origination fees are tax deductible to the buyer, regardless of who pays them. This is a particularly unusual deduction because you get the benefit even if the seller paid your closing costs. Make sure to look at lines 801 and 802 of your settlement statement to see who paid them. And because origination fees of 1% and more are common, this can amount to a lot of cash.
And this one´s the best. In fact, I can hardly believe it myself. Here's how it works:
If you have owned and occupied your principal residence for at least two of the past five years, you can earn up to $500,000 on the sale of that house and pay no federal income tax whatsoever. That's assuming you are married - singles get up to $250,000 tax free. And guess what..
You can do this as often as every two years for the rest of your life.
This is as good an excuse for getting married as I have ever heard. Buy a fixer-upper in an up and coming neighborhood, work on it nights and weekends for two years, then sell it at a nice profit and pocket the cash, totally free of federal taxes. And most states recognize the federal exclusion, so you put the cash away totally tax free. You don't have to re-invest, you don't have to be age 55, and you can do this every two years forever. No, I'm not kidding.
The one restriction is that you MUST own and occupy the house as your principal residence, so don't try this on a rental home by pretending you live there when you don't. And there are some unclear rules about how you can take a partial exclusion if you live there less than two years, but we don't really know what they mean yet, so I recommend you stay there two years.
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