Tax benefits for first-time home buyers

If you have been waiting for the right time to buy your first home, 2009 is your year. There have always been many tax benefits to home ownership, but recently passed legislation makes the deal even sweeter for first-time home buyers. In response to the housing market decline, the federal government is offering first-time purchasers a tax credit of up to $8,000 that does not have to be repaid if the home is owned for at least three years.

The tax credit is equivalent to 10 percent of the home’s purchase price, capped at $8,000. Eligible taxpayers must purchase their first home before December 1, 2009 and their adjusted gross income must not exceed $75,000 per person, or $150,000 per married couple.

In addition to the new tax credit, first-time home buyers may be quite surprised at how many other tax benefits await. The interest on a first-home or second-home mortgage is fully deductible up to $1 million. The interest on up to $100,000 of home equity debt is also tax-deductible, regardless of what the loan is used for. This is a tremendous benefit because interest payments consume the vast majority of payments over the first several years.

Loan discount points and origination fees, commonly grouped into closing costs, are tax-deductible for home buyers – even if the seller pays closing costs. In terms of loan origination fees, for example, this typically means you could deduct 1% or more of the home’s purchase price.

Best of all, profit of up to $250,000 per individual ($500,000 per married couple) off the sale of a home is non-taxable income. Any profit beyond that is subject to capital gains tax. The caveat is the taxpayer must have lived in the home at least 24 months out of the previous five years, but the 24 months do not need to be consecutive. Add to this the fact that homeownership-related tax deductions often allow taxpayers to reach a point where they can itemize other smaller deductions like charitable giving, and homeownership begins to look quite profitable. When handled correctly and within your financial means, buying a home can truly be a winning deal.