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All things being equal, owning a house is generally preferable to renting. If your monthly mortgage payment is about the same as the rent payment for a similar property, then you are building up equity with each mortgage payment you make. In addition, if the housing market in your area appreciates over time (which it should), you are gaining additional equity from this appreciation. Another major advantage to buying a house is the savings you can potentially receive on your tax liability.
Before even moving into the house, you may already have a fairly large tax deduction; closing costs. In most cases, the IRS will allow you to deduct the loan origination fee for taking out the mortgage. This can range from 1% to 4% of the loan value. For example, if you take out a $200,000 mortgage with a 2% origination fee, that amounts to $4,000.
While living in the house you own, you also have the ability to deduct home mortgage interest and property taxes. Here is a simple example of how much this can save someone on their monthly housing costs; letâ€™s take an example of a single person with an adjusted gross income of $100,000. If this person were renting, they would likely claim the standard deduction of $6,100 and personal exemption would be $3900. This brings their taxable income to $90,000, giving them a 2013 federal income tax of $25,200.
Now letâ€™s say this same individual decided instead to buy a home in 2013. They can now potentially deduct closing costs (using the above example, this would be $4000), mortgage interest of $10,000, property taxes of $2000, and miscellaneous itemized deductions of $1500. With total deductions equaling $17,500 added to the personal exemption of $3900, they can now lower their taxable income by $21,400 to a total of $78,600.
In this example, the individualâ€™s taxable income reduction puts them in a lower tax bracket (28% down to 25%). The 2013 federal income tax for an individual with taxable income of $78,600 is $19,650, saving them a total of $5550 in taxes for the year.
This is just one common example of the type of savings homeowners can realize on their annual tax burden. As always, each individual circumstance is unique. If you purchased a home last year and are unsure which deductions apply to you, speak with a local tax accountant for further details.