Owning a home can lend several benefits to home owners and one of the major benefits is the tax advantage. The tax advantages work out for both home owners in their primary residence and investors.
- Loan Interest. The biggest tax break that you’ll get is the on the loan interest you’re paying into your mortgage on an annual basis, that is of course if you elected to do a 10-,15-,30-year loan or any type of ARM (adjustable rate mortgage). All of the interest on loans under $1 million is deductible.
- Points. If you paid points on your home loan, you can get a tax break on that, too. In short, if you bought points to reduce the interest rate on your primary residence, you can deduct points in the year you paid them.
- Property Tax. According to bankrate.com, during the first year you purchase your home you can fully deduct any property taxes that were paid on your new investment. You can find the dollar amount that you paid at the time you closed on your home in your settlement documents. For the rest of the time in your home, your property taxes will be a deduction when you file each year.
SPECIAL TIPS FOR INVESTORS
Creating a long-term strategy and consulting with an accountant and/or tax specialist can be the best approach to ensuring that your real estate investments remain profitable for you.
1. Rental Improvements. You may receive deductions on any rental maintenance that is made to the property. This might include appliance repairs, advertising for rent, necessary home improvements and more. The most important thing to do is to remember to keep all receipts associated with improving the home and/or a spreadsheet that outlines what expenses have been paid.
2. Insurance Premiums. Homeowners of primary residences cannot deduct home insurance premiums but investors can. Make sure you include the cost of any insurance in your taxes.
3. Depreciation. If you’re doing your own taxes, and not using an accountant, you’ll want to calculate out the depreciation on the property. This is deductible for investors, too.
4. Local and Long Distance Travel. Any travel fees associated with the management of your property can be deducted. You’ll need to calculate the mileage and mode of transportation to and from the home to get a return on this item.
5. Property Management Fees and Professional Services. Any professional services associated with the rent, maintenance, and upkeep of the property are also deductibles. This might include fees paid to attorneys, property management companies, real estate investment advisors, etc.
6. Avoid paying Capital Gains Tax. Hold on to your properties for 1-2 years. Particularly in Georgia right now, it may take some time for your new investment to see more equity. You can avoid paying a hefty 10%-15% in Capital Gains tax when you own the home for at least 2 years. You can avoid paying it altogether if you turn your investment into your primary residence and hold it for at least 2 years.
In each scenario above, whether you are purchasing your home to live in it as a primary residence or seeking an investment, we highly recommend that you seek the advice of an experienced professional when tax season comes around. This expert will know what’s pertinent to your own situation based on the information you provide him or her. So remember, keep your paperwork and keep your receipts!