Wouldn’t it be great if the government kicked in some money to help make home ownership more affordable? Because of deductions on mortgage interest and property taxes, the practical effect is that the government is subsidizing your home purchase. In fact, home ownership provides two of the best ways to reduce your tax bill.
Mortgage interest you pay can be deducted from your gross income to reduce your taxable income. For example, say you take out a $300,000 mortgage loan at 6 percent interest. You pay $18,000 a year in interest on that loan. That means your taxable income for the year is reduced by $18,000. If you’re in the 25 percent tax bracket that means a one-year tax savings of $4,500 (25 percent of $18,000).
Property taxes may also be deducted from your gross income, lowering your overall annual tax obligation. Property taxes are levied on homeowners in the United States to pay for a variety of public services. You may see local property tax rates between 1 and 2 percent of the property’s current assessed value, depending on where you live. Property taxes are fully deductible on your primary home, second home or vacant land.
Speaking of tax smarts, be sure to also consult your advisor about tax breaks that may be available on the proceeds from selling your current home, and on any “points” paid when taking out a mortgage loan.
In another move to help restore confidence and stabilize the housing market, in late July President Bush signed a far-ranging housing bill into law. The legislation provides funds to shore up finance giants Fannie Mae and Freddie Mac, who guarantee a large portion of the nation’s mortgage loans. The law also provides help for troubled borrowers struggling with mortgages and tax credits for first-time homeowners.