Buying your first home is a statement of your intention to build a massive investment, a sizable equity and a safe zone for you and your family. Naturally, a big and long term commitment such as this has its share of pain and sacrifice. The federal government has long tried to ease this process and make it as easy as possible to buy in to a home and to create an ownership society where every individual is a property holder. To this end, there are numerous tax breaks available for buying a home and to help you reduce the net cash outflow on account of mortgage payments.
You can deduct mortgage interest on up to a $1 million debt for a home loan and also on points paid to the lender for closing the deal. Form 1098, sent to you by your lender in January, will list all the interest paid by you in the preceding year, which you can then deduct on Schedule.
Additional deductions you can avail of include property taxes paid by you to the local municipality, and also against private mortgage insurance premiums paid by you, if any. Please note that PMI premium deductions are available only for mortgages executed in 2007, and not for those issued in prior years.
In addition, if you need financial help in excess of the mortgage, homebuyers are allowed to withdraw up to $10,000 from an IRA, regardless of the age of the account holder, without any early withdrawal penalties being imposed, provided that the withdrawn amount is used solely for buying or building a home within 120 days of withdrawal. Under normal circumstances, early withdrawals from an IRA before age 59 ½ are slapped with a 10% penalty and possible additional charges depending on the terms of the contract and the financial organization involved.
Please note that a traditional IRA will still impose taxes upon withdrawal. What you can do is open a Roth IRA and rollover your contributions to the Roth which makes the withdrawal totally tax free. If you are then willing to wait for 5 years after opening the account, you can use the special concession for homeowners to make a $10,000 tax free early withdrawal from the Roth IRA. In this way, you not only avoid early withdrawal penalties, but also all taxation on both contributions.
If you keep track of all expenses and bills paid on account of home improvement costs, you are allowed to add this cost in to the purchase price of your house to calculate the cost basis for taxation on real estate sales. This is generally not a major issue since up to $250,000 of profit on sale of your primary residence is tax free for an individual and up to $500,000 for joint filers, provided certain home owner criteria are met, such as the individual or either one of the spouses having lived in said residence for at least 2 of the 5 years prior to sale.
These deductions and breaks, if made use of in the right way, can lead to a significant easing of the burden of mortgage payments. When you compare the mortgage payments against a net calculation of the benefits of owning a home, taken in conjunction with the afforded tax breaks, savings on rental payments and increase in home equity value, it leads to a very simple conclusion – Start saving to buy a home at the earliest, regardless of the state of the real estate market.