In the US, around 65% of adults own a home. Buying a house or an apartment can help you feel more secure and build up equity. But what are the tax implications of owning a property? Are there any benefits? And do you need to pay for tax resolution services before buying a home? In general, owning property can reduce your tax liability, but it depends on your situation. A good Louisiana tax resolution specialist can help you navigate your purchase.
They will show you what tax credits and deductions you are eligible for so you don’t miss out on any of the benefits. What’s more, your specialist will speak to you about what happens when you’re ready to sell your home. Generally, you pay much less tax when selling a property than when earning an income through work, so owning your own home can help you stabilize your finances and build up wealth without being heavily taxed.
How Does Buying a New House Change Your Tax Liability?
Most people who buy a new home are eligible for several tax breaks and tax credits. What’s more, selling a property that you have owned for more than a year can help you reduce your liability further because capital gains are taxed at a lower rate than earned income. Additionally, you might not have to pay any tax on your primary residence if you have lived in it for two years or more.
Tax Breaks Related to the Mortgage
When you buy a property and get a mortgage, you can benefit from tax breaks. For example, you can deduct your mortgage interest on the first $750,000 of your debt, or, if you bought your property before December 16, 2017, on the first $1 million. Every January, you will receive a form from your lender that shows you how much you paid in interest. You can then use this to fill out Form 1040 or 1040-SR.
When you get a new loan or refinance your current one, you might pay your lender mortgage points. Each point is the equivalent of 1% of your debt, and it reduces your interest by 0.25%. For example, if your mortgage is worth $500,000 and your interest rate is 5%, you can pay your lender $5,000, and you’ll pay just 4.75% interest in the future. These mortgage points are also tax-deductible, and so is private mortgage insurance.
Other Possible Tax Breaks
There are several other reasons why homeowners might be eligible for tax breaks. A professional offering tax resolution services can go through them with you and determine which ones you might be eligible for. For example, installing renewable energy sources like solar panels or a better insulation system on your property might earn you a credit, either a fixed amount or a percentage of the total renovation cost.
You might also be able to deduct some of your expenses if you use a part of your property for your self-employed business. Usually, you can deduct $5 per square foot, up to a total of 300 feet, but only if you use a separate room as an office, not if the workspace is a part of your bedroom. Since the IRS is likely to ask for proof, it’s important to discuss this tax write-off with a Louisiana tax resolution specialist.
Selling a House
When you sell your home, you might not have to pay any taxes because of the home sale exclusion. This specifies that the first $250,000 you make on your house sale won’t be taxed as long as you lived in and owned the property for at least two out of the last five years. Any additional profit will be taxed at the long-term capital gains tax rate, which is 0%, 15%, or 20%.
If you’ve owned your home for less than a year, you’ll have to pay the short-term capital gains tax rate, which is the same as your regular income tax rate. For this reason, people who flip houses pay more in taxes than those who keep them for the long term.
Is Buying a Home for Tax Reasons Worth It?
Buying a home for tax purposes alone isn’t usually a good idea. Remember, a deduction doesn’t mean that you save 100% of the money. If, like many Americans, you’re taxed at 12%, you’ll still pay 88% of your interest without any deductions, and even if you’re in one of the highest brackets, the deduction will be less than 50%. It’s also important to remember that home prices can fall as well as rise, and there are no guarantees.
However, owning their own property is a dream for many Americans, and if you’re interested in purchasing a house or apartment anyway, the tax benefits are an additional advantage to consider. Speak to your Louisiana tax resolution specialist about how much you’re saving with the deductions and whether paying off your mortgage or holding onto it and investing your money would be better.
Other Ways of Reducing Your Tax Liability
If you’re not quite ready to buy a house, there are many other ways to reduce your taxes. The most important one is to always file and pay on time, since this prevents the IRS from adding a penalty to your account, charging you interest, or even garnishing your wages and taking away your assets. People who are worried about paying tax can take advantage of the forgiveness program, which allows them to pay more slowly or even reduce their bill.
Self-employed workers and those who own a business can further reduce their taxes by deducting all their expenses, which might include supplies and materials, travel costs, and education costs. Other strategies include using your health savings account and all the retirement accounts available to you, since they can lower both your current tax bill and your future liability.
Do I Need Tax Resolution Services?
Unless your tax return is very simple, speaking to a professional is highly recommended, especially if you’re struggling to pay your bill, you believe you’re paying too much in tax, or you are thinking of making a big change such as buying a home. A tax expert will be able to analyze your financial documents and let you know what changes you need to make to optimize your situation. They can also talk to you about financial aid if you’re worried about future tax bills.
Accessing Louisiana Tax Resolution
Finding a good tax resolution expert isn’t hard. Start by browsing websites online, and contact suitable firms directly to find out whether they are responsive and helpful. When selecting someone, always choose a professional with several years of experience. The owner of Geaux used to work for the IRS, so he is the perfect person to speak to if you need advanced guidance or if you need to negotiate with the government.
When you get a mortgage to buy a property, you can save money on taxes because your mortgage interest is tax-deductible. What’s more, you might not pay as much tax on capital gains as you would on income when you sell your home, especially if you keep your home for the long term. Contact us at Geaux Tax Resolution to find out more about how property is taxed or to take advantage of our tax resolution services.