People are often surprised to find that buying a home greatly affects their taxes. Some of the effects of becoming a homeowner, such as suddenly qualifying for new tax write-offs, can be positive. Others, such as tax liabilities, can be negative. However, if you’re smart about your purchasing decision, you can buy a home and benefit greatly, instead of buying a home and regretting your decision come tax-time.
For best results, hire a financial adviser who can help you to make the right decision about when and how to buy a home and what to do (and what NOT to do) after you’ve purchased one. At the very least, though, do your research on how different choices will affect your taxes, and make decisions that will benefit you both now and in the long-run. To help you out, we’ve looked into some common real estate decisions and how they are likely to impact your taxes.
The Reality of Refinancing
Many people think that refinancing will help to solve all of their financial problems. They believe that if they can just pay a lower mortgage each month, they’ll get back on track or maybe even be able to pay off their home loan more quickly. And, while these things are sometimes true, there definitely can be some major drawbacks to refinancing.
To begin with, when you refinance your mortgage and pay less interest, you’ll lose that sizable mortgage interest deduction you’re probably getting…or that you SHOULD be taking advantage of. If you’re not taking advantage of this option, doing so and seeing the results could cause you to think twice about refinancing.
The bottom line is that refinancing DOES work for some people, but it can have disadvantages, so make sure that you are considering all other options, as well as ALL the effects of refinancing, especially as they relate to your taxes, before you make this decision.
The Effects of Remodeling
You might not think that remodeling your home has anything to do with your taxes, but, in truth, it actually does! That’s because remodeling your home can increase your home’s value, which, if you sell your home, could mean that you actually make a profit on the sale.
If you don’t want to risk getting charged a capital gains tax, make sure you have proof of all the remodeling that you paid for. That way, you can include the amount spent on remodeling in the “purchase price” of your home and avoid getting taxed for the full amount for which you sell your newly improved home.
Also bear in mind that, depending on where you live, some remodeling projects, especially those that make a home more energy efficient, can qualify you for tax credits or other incentives, so definitely don’t miss out on these “bonuses” if they’re available to you.
As you can see, your home and the things you do with it can affect your taxes in many ways, some good and some bad. For best results, work with a tax professional to make real estate decisions so that you can get more of the “good” and less (or none!) of the bad.