Daytona Beach First Time Home Buyers - Watch Out for The Tax Trap
Buying your first home can be very exciting, and at the same time, uncomfortable. There are thousands of Daytona Beach homes for sale and looking at homes is often the most enjoyable parts of the process. There is no lack of people willing to give you advice and there is no lack of real estate agents willing to work with you. The purpose of this article is to shed light on one of the most often touted avantages the home ownership - income tax deductions.
Florida has no state income tax, so there is no state property tax deduction. That’s OK, we’re much better off without the income than having a deduction. So, Floridians can deduct certain housing costs from there federal income tax, if, and this is the big if, the deductions reach a certain threshold.
To deduct the eligible housing costs, you will need to use the full 1040 form and use Schedule A. You need to reach a threshold of $10,900 (married filing jointly) for 2008 for the deduction to be of any value.
Let’s say that after looking at Daytona Beach condos, you make you purchase. You pay $130,000 and finance $117,000. Your full year interest on that amount is about $7,367. Property tax on $130,000 will be about $2,292 assuming that you take the $50,000 homestead exemption.
If you are married and filing jointly, the total of property tax and mortgage interest is $9660. This is over a thousand dollars under the the $10,999 threshold. In other words, there is no tax benefit for you owning the home unless you have other deductions to push you above the threshold.
Now, let me clear that you need to talk to a tax advisor about this, especially during the year that buy and sell your home because you may be able to deduct points and other costs. It is important that in the year that you buy the home that you deduct all eligible costs of buying. Only a good tax advisor can tell what is eligible and what’s not.
The second point that you need to understand is that the value of the deduction is based upon your tax bracket. Let’s say that your mortgage interest, property tax, charitable contributions and other deductions come to $20,900. You are now $10,000 over the threshold of $10,900. Just how much is that worth to you?
The answer depends on your tax bracket that’s based upon your Adjustable Gross Income minus the number of $3,500 exemptions that you have (One each for husband and wife and then one for each child - note that there are others available). We will assume a joint adjustable gross income of $48,000. With $7,000 worth of exemptions, the taxable income with be $41,000. You have $20,900 worth of deductions that take the taxable income down to $20,100. If you took the standard deduction, your taxable income would $30,100. The tax bracket in this case is 15%, so the $10,000 deduction reduced your taxes by $1,500.
The major benefit of owning a home is long-term appreciation. Daytona Beach property prices have dropped around 20% over the past two years, but we’ve seen some recent evidence that the bottom may be near. Buying now will probably put you near the bottom of this market cycle and give you the best chance of solid long-term appreciation.
Finally, most people do not buy a home for the tax benefit. They buy to build equity in the home and to have a place of their own. The point of this article is that the tax benefit touted by many people is not very significant for many first time home buyers. Make sure you clearly understand all of the costs of ownership before you buy.
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