For many people, purchasing a home, or homes, is the single largest investment they will make in their lifetime. It is a decision that will affect their finances, lifestyle, and family for years to come. Because of this impact, it is important to consider all aspects of home buying, along with the pros and cons of the choices that are being made. Aside from the actual home buying process, a question most homeowners have is: “What are the tax advantages of buying a home?”
The answer is: DEDUCTIONS, DEDUCTIONS, DEDUCTIONS!
When considering a home purchase, one very big pro is the favorable tax 
treatment you are able to take advantage of on your individual tax return. Deducting mortgage interest and real estate taxes is often what makes it more beneficial for taxpayers to itemize their deductions (rather than using the standard deduction); along with state income taxes paid. This makes itemizing more advantageous. These deductions reduce taxable income, which in turn, reduces taxes due. Typically, personal interest, such as credit card or car loan interest paid is not deductible, but qualified residence interest (with a few restrictions) is fully deductible.
You can deduct the interest paid if you meet the following criteria:
–Your home is your principal residence (meaning that’s where you spend the majority of your time)
–The loan is $1 million or less, and secured by your home
–The loan proceeds were used to acquire the home, or were used to substantially improve your home
You can also deduct the interest on a second home mortgage (such as a vacation or mountain home), as long as the second home mortgage amount, when combined with the principal residence mortgage, does not exceed a combined total loan amount of $1,000,000. For example, if your principal residence mortgage equaled $700,000, and you purchased a second home with a mortgage of $600,000, you would be able to deduct the interest on your $700,000 principal residence mortgage and you would be able to deduct the interest on $300,000 of your second home mortgage ($1,000,000 – $700,000) for a total interest deduction on $1,000,000 of your mortgage balances.
The interest on home equity loan debt is also deductible. The home equity loan interest deduction is the interest on a loan amount that is the lesser of the loan balance, up to a $100,000 loan, or the fair market value of the home minus acquisition indebtedness. This interest is deductible for regular tax purposes, no matter the use for the money. If the loan is not used to acquire the property or make substantial improvements to the property, then careful consideration should be made before securing consumer debt with your home. If it is the right option for you, home equity loan debt can be used to purchase a new car, a vacation, a hot tub, consolidate credit card balances — whatever your heart desires. The interest will be deductible for regular tax purposes, however the amounts are not deductible when calculating alternative minimum tax (AMT) . The ability to deduct home equity loan debt interest allows individuals to effectively exceed the $1 million loan limit by an additional $100,000, thus making the interest on combined home-secured loans up to $1.1 million, deductible.
The table below illustrates how various income levels and age groups would likely be affected if the mortgage interest deduction were not allowed. For, example, average homeowners with income over $250,000+ would generally see an increase in their tax bill of $5,408, if the mortgage interest deduction were not allowed. Another way to look at it, is that homeowners with income over $250,000 on average will see a $5,408 reduction in their tax bill when taking the mortgage interest deduction. The ultimate benefit to a particular taxpayer is a case by case analysis that depends on the timing of the home acquisition, the interest rate of the loan, the principal of the loan, income level, other itemized deductions, etc.
Points paid that are associated with initial acquisition indebtedness or are associated with the substantial improvement of a principal residence may be fully deductible. Points paid that are associated with the acquisition indebtedness of a second home must be amortized over the life of the loan. Points paid on all refinances must be amortized over the life of the loan. All other settlement costs are required to be capitalized and added to the basis of the property.
Every home has real estate taxes and those are deductible as well. And unlike qualified residence interest that can be deducted on a principal residence or second home, the real estate taxes paid on all of your properties is deductible, even if you own more than two properties!
A final major tax advantage comes when it is time to sell your home. If you own and live in your home for two of five years and you haven’t sold another home within the two years prior to the sale date, the gain on the sale, up to $250,000 ($500,000 for married filing jointly), is excluded from income tax. The con side to this exclusion is that any loss on personal residence is not deductible.
There are significant tax advantages to owning a home, and several rules and restrictions in place on the tax treatment of various items. Consult your tax advisor on the proper treatment for your situation. Should you need a tax advisor, Thompson Greenspon is happy to assist with your tax preparation and planning needs.
4035 Ridge Top Road #700, Fairfax, VA 22030
(703)385-8888 | www.tgccpa.com
SHORT SALE
FORECLOSURE
The 
Another scenario where a buyer can escape the need for a down payment is a loan from the 
A third loan option that has no down payment is a 
Conventional
Contacting a lender to get pre-approved for a loan should be the first action item for anyone that is interested in buying a home. The pre-approval process will typically begin with a phone conversation or a face-to-face meeting between the borrower and the loan officer. The prospective borrower will need to fill out a loan application and give the loan officer permission to run a credit report.
-Permission to run a credit report
-Does the borrower own any properties currently
–
After gathering information from the initial conversation, loan application and credit report, the lender may need additional documentation in order to provide a pre-approval letter. Once this information is received and reviewed, a lender should be able to let a borrower know the amount of a monthly housing expense payment they would qualify for. A pre-approval letter is a written commitment by a lender to provide a mortgage loan to a borrower. With a pre-approval letter in hand, potential buyers are able to look for properties in their price range with a high degree of confidence that they can purchase a home that fits their needs.
If you are curious about how the process works, check out our previous blog on the entire 
These three reporting entities will provide a credit score that is used to determine the risk associated with a particular borrower regarding repayment of the loan. A number of credit related variables are used to calculate the credit score. The credit score is used as a predictor as to the likelihood that the consumer will have late payments in the next 24 months. The lower the score, the greater likelihood that the borrower will be late on a payment or payments.
Payment History………….7 years(Date of last activity)
HAZARD INSURANCE
WHAT IS INCLUDED – Be very clear about what is covered and more importantly what is NOT covered. You don’t want to lose something and later find out it wasn’t included in the policy.
BUSINESS NEEDS – Do you have a home office? There are both property and liability business exposures that most standard homeowner policies don’t address, as well as low levels of coverage. The typical policy appears to be around $2,500 for in-home office equipment. And while that may sound like enough, by the time you add the costs of your computer, software, tablet, printer, scanner, phone, furniture, etc., it could very well exceed that amount. You’ll need to find coverage that can include all of your home office equipment and supplies.
LOWER INTEREST RATES – Interest rates can be lowered due to a change in the industry as a whole, such as the example above. Interest rates can also be lowered by shortening the term of the loan. 15 year rates will be lower than 30 years loans. Adjustable Rate Mortgages (ARM’s) are loans that are fixed for a specific time period such as 3, 5 7 or 10 years and will typically be offered at rates lower than a 30 year fixed loan.
Most loans require the borrower to pay for property taxes and homeowner’s insurance on a monthly basis as part of the mortgage loan payment. When property taxes are due (typically twice a year), and homeowner’s insurance (annually) the lender will pay the bills out of the escrow funds.
–Government Recording Fee – fee charged by government to record the deed of trust
interest rates from the low 3% to over 4.5%.
No one can tell for sure what rates will do, but everything I hear and read indicates that interest rates will rise gradually through 2015. We may see rates approaching 4.5% or even higher by the end of the year.