Real Estate Blog


    tax advantage of buying a home vs renting


    If you’re considering buying a home, you’ve probably thought about the financial implications a lot. It’s important to know how much you can afford in total, the downpayment you can put down, and to calculate your monthly expenses compared to your current rent. However, there are also tax advantages of purchasing a home vs renting. Consider these 5 tax advantages when you’re figuring out whether to purchase a home or continue renting. 

    5 Tax Advantages to Purchasing a Home vs Renting

    When you rent, you have the freedom to move when you need to, but you’re not acquiring anything as you make rent payments. When you purchase a home, you’re gaining equity as you make mortgage payments and make home improvements. Since you make payments over a longer time period, your monthly mortgage payments might even be less than your rent, depending on the home that you buy, your interest rate, and other factors. The tax advantages of purchasing a home can also offset some of the costs. 

    Please note: These are guidelines for deductions and credits that may be available, not financial advice. Consult with a tax professional before using these deductions.

    1. Mortgage Interest Deduction 

    If you itemize your return, you can deduct all or part of the interest you pay on your mortgage. If you mortgage totals less than $750,000, you’ll be able to deduct the interest you pay. Your lender will provide a record of the interest you paid, and you’ll need to file Schedule A with your tax return. Remember that the Home Mortgage Interest Deduction is not the same as a tax credit. A deduction reduces the total income that you pay taxes on, while a tax credit reduces your actual tax amount.  

    2. State and Local Tax (SALT) Deductions 

    The state and local property tax that you pay on your new home may also be deductible if you itemize your return. As of 2018, there is a limit on this deduction. You can deduct up to $10,000 of state and local taxes on your federal tax return. Once again, you’ll need to itemize your return to take advantage of this. 

    Everything you need to know about finding and purchasing your first home

    Get your copy of the First-Time Homebuyer’s Guide

    3. Mortgage Insurance Premium Deduction 

    When buying a home, your lender will require you to also purchase insurance on the property. Your private mortgage insurance (PMI) premiums may also be deductible on your federal tax return. To take this deduction, your adjusted gross income (AGI) must be less than $109,000 (for married couples filing together). This is also an itemized deduction. 

    4. Deductions on Eco-Friendly Home Improvements 

    Eco-friendly home improvements will not only reduce your energy bills and your carbon footprint, but they can also reduce your tax bill. If you add any of the following to your home, you can deduct a percentage of the investment from your taxes. 

    • Solar panels 
    • Solar water heaters 
    • Wind turbines 
    • Geothermal heat pumps 
    • Fuel-cell equipment

    5. Deductions for Other Home Improvements 

    Generally, when you make improvements to your home, you’ll gain equity as you increase the value of your home, but you won’t be able to deduct these expenses from your taxes. There are some exceptions to this, however. 

    If, for example, you have a disabled family member, making medically necessary changes or improvements to the house can be tax deductible. For example, if you add a ramp, widen doorways or hallways, add lifts, or modify electrical outlets or switches, all of these changes may be tax deductible. 

    If you make improvements to your home to use it as a business, this may also be tax deductible. For example, if you improve a part of your home to use as your home office or a place to meet with clients, you may be able to deduct these expenses. If you plan to rent out your home, improvements you use to make the home safer or more attractive may also be deductible. For this, you’ll need to file different forms when you file taxes for your business. 

    When you buy a home, you do take on more financial responsibilities than you would when you are renting. However, the tax advantages to purchasing a home vs renting can help you to reduce this amount. Consider your financial position and future goals carefully when making this decision, and you can be confident in your choice. 

    Free Download: First-Time Home Buyers Guide

    New to the home buying process? Simple advice to help you feel at home while buying one.

    Download the Guide »
      • Home Finder Pro

        Own More of Your Home. Everything You Need to Know About Building Home Equity. Download the Guide ›