A Tax Shelter You Can Live In

Homeowners reap tax rewards while investing for the future Owning a home provides privacy, security and a sense of community. But aside from the many personal advantages, homeownership comes with a major financial advantage - tax benefits.

What other investment allows the first $250,000 to $500,000 of gain to go tax free? And what other investment allows you the leverage to attain that gain while subsidizing the interest payments through tax deductions? Many people have said that owning a home is their single best investment and with such advantages, why not?

Owning a home verses renting can lead to a significant amount of savings when tax time rolls around. While taxpayers should always seek advice from a tax professional, it is clear that owning a home offers some of the biggest tax advantages available under our tax code.

Looking to build equity? Seeking tax deductions? Looking for leverage on an investment? You can find all the above in homeownership.

Benefits for taxpayers include:

Deduct property taxes and interest

Most homeowners can deduct property taxes and interest paid on their mortgage. Interest paid on a second mortgage may also be deductible if the total of the first and second mortgages is no greater than one million dollars.

Homeowners can borrow against the equity they build. "Buying a home is aninvestment for your future," said Tom DePasquale, tax advisor, Jackson Hewitt Tax Services, Parsippany, NJ. "Equity from a home can be used to improve the property, buy a car or pay for an education, and the homeowner may have the ability to deduct the interest from their federal taxes. Renters never have this opportunity."

Tax Free Gains

Single tax payers owe no tax on the first $250,000 of profit from the sale of aprincipal residence. The amount is $500,000 of profit for married couples filing jointly. This tax free gain is not a one time affair, either. You can roll over your apartment and take the above gain every two years.

Deductible closing costs

Certain closing costs may be deductible if the move is job-related and therelocation is 50 or more miles from the previous residence. Depending on where you live, certain real estate tax exemptions apply for people who meet specific criteria. "In New Jersey for example, disabled war veterans and their surviving spouses are exempt from real estate and property taxes. Homeowners should check with local tax consultants to see if any exemptions apply to them," said DePasquale.

Buy early, save more

Is there a best time of year to buy a home? Yes, the earlier in the year, the better. If you purchase a home during the first six months of a year, you have deductible closing costs, and more months of deductible mortgage interest. Of course in the long run, owning a home will save you money on your taxes regardless of when during the year it is purchased.

Leverage can create outsized gains

Because you can borrow on average about 80% of the value of your property, the cash invested can accumulate equity quickly. For instance, if home prices rise on average 4% per year and you have put 20% down, then the cash on cash return is 20% per year. Money compounding at that rate adds up fast.