12 Feb 2018

Tax Benefits of Owning vs. Renting a Home

Tax season is just over the horizon, and even in the middle of January, homeowners and renters alike are looking at ways to maximize their tax returns. There’s no doubt that finances are a big decider for people who may be trying to decide between renting and buying. But how does this affect taxes, and which form of housing can give a better pay-off in the long run?

If you weren’t aware before, mortgage interest is tax deductible. After receiving a 1099-NT form from your lender, you’ll be able to see how much interest you paid over the course of the previous year and be able to refer to that amount when filing your taxes. If you’re a new homeowner, the majority of those initial payments are put towards interest so you should see quite the kickback from it.

“For example, say you have a 30-year loan and borrow $250,000 at 4.00%,” says NJ Lenders Corp Mortgage Bankers. “Your payments are just shy of $1,200. Your first payment of $1,193 includes $360 toward the loan balance and $833 to interest. Over just the first year alone your mortgage interest tax deduction is $9,919.”

Renting, unfortunately, will not yield the same profits. The reason homeowners can file their mortgage as part of their tax return is because they pay interest in addition to their property taxes. And while your landlord may factor these extra costs into the total amount of your monthly rent, at the end of the day, they’re the ones making the direct payments. You, personally, cannot deduct interest from your rent because you don’t own the home. Renters also don’t pay property taxes, which is another thing that homeowners are able to deduct.

You may also be able to claim up to $500 in tax credits for making your home more energy efficient, such as by installing eligible windows, doors, insulation, and a heating and cooling system. Even if your landlord decides to make these changes to the property, you, as a renter, still won’t be the one reaping the credit.

“A tax credit is even better than a tax deduction because you use a credit dollar-for-dollar to offset what you owe in taxes,” says Dona Dezube of houselogic.com. “So, if you owed $500 in federal taxes and you could claim a $100 tax credit, you’d have to pay only $400 in taxes”.

Although getting several thousand dollars in deductions is a terrific benefit, it’s only part of the financial boost you get as a homeowner. Once you buy, you’ve locked in your monthly housing costs — no rent increases — and in the future, you end up with a valuable asset: a paid-for home.

The benefit of renting is that it saves you a lot when it comes to upfront costs. Mortgages will always require a down payment and things like closing costs and realtor fees can start to add up, too. Even after having to put down a first month’s rent plus security deposit, you’d still probably end up spending less than you would by putting a down payment on a home purchase. The true benefits of buying your own house happen over the course of the homeownership, where you find yourself able to build personal wealth through equity and tax write-offs.

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