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Renting vs. Buying a Home: Which is Better for Your Taxes?

Shara Abrams SVP, Franchise Operations Published On September 25, 2019

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Owning a home is part of the American Dream, isn’t it? With mortgage interest rates at an all-time low, stable job market and rising wages, many people are pursuing homeownership. Despite all this, you may still be torn between buying and renting. Knowing the tax implications of buying a home versus renting one might help you make a better, more informed decision.

Tax Implications of Renting

While there are no federal tax deductions available if you are paying monthly rent on a home, in certain states, your home might save you some money on your state taxes.

  • Property Tax– If your lease agreement states that you pay property taxes as part of the terms of rent, you can deduct that portion of your rent, if you live in a state that allows this practice.

  • Casualty Losses - You will also be able to deduct loss of property or the cost of damage suffered due to a federally declared disaster after your insurance payouts.

  • Tax Credit for Renters– See if you live in a state that offers renters credit based on the portion of rent your landlord charges you to cover property taxes.

  • Home Office– You may be able to claim the home office deduction if you are self-employed and use a part of your rental home exclusively for your business. The amount of the deduction will depend on the size of your home office and the method you use to determine your expenses.

Tax Breaks and Advantages of Owning a Home

As a homeowner, you might be able to itemize deductions and claim a significant number of tax breaks based on your home, including:

  • Property Taxes– You can claim your real estate taxes paid on your home. Tax reform limited the total allowed deduction of your property taxes and state and local income or sales taxes to $10,000. Your state tax return may allow the full deduction of your property taxes, even if over $10,000.

  • Mortgage Interest– While you can deduct your mortgage interest, there is a limit on the total amount of debt owed. For instance, the interest paid on up to $1 million in principle is deductible if the loan was issued before December 14, 2017, and up to $750,000 in principle for loans entered into after this date.

  • Home Improvements– Simple home improvement projects, such as painting the home or carrying out some plumbing work in the kitchen, and major repairs or improvements that enhance the value of your home, are not eligible for tax deductions. Major repairs or improvements can be used to decrease any gain you may have when you sell it. And if you refinance your home or take out an equity line of credit or loan to do the work, the principle may be deductible. The IRS allows a credit on certain energy efficient enhancements to your home. Your state may also offer a tax break for making your home energy efficient.

  • Income From Rent– Renting out homes is a lucrative business, and it is essential to report this income on your taxes. You can claim all your real estate taxes and mortgage interest, even your insurance and any money spent on repairs, as a deduction.

  • Capital Gains– When you sell your main home, up to $250,000 ($500,000 if Married Filing Jointly) is tax­-free if you meet certain requirements. You must have lived in, and owned, the property for a minimum of two years in the preceding five years. Make sure you include all your improvements, such as an addition, a new roof, or even new carpeting, as part of the cost of your home. These costs will help lower your potential gain to ensure you remain below the $250,000 ($500,000) tax-free gain cap.

Now that you’re a little more familiar with the tax implications of renting or buying a home, you’ll be better equipped to make that decision when the time is right for you

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