Are you looking for ways to help plan a secure future and lower your taxes? Believe it or not, a mortgage loan might help you do just that. There are basically two ways a mortgage can make a big difference on your taxes: as a home investment and as an investment in a rental. Here's a quick guide to how each method can make the most out of a mortgage to keep your taxes low and your future bright.
Itemizing Deductions
Taxpayers generally get to choose between a standard deduction and itemized deductions to reduce their overall income before determining what is taxable. In 2016, the standard deduction for single filers is $6,300 and is $12,600 for married filers reporting jointly. You may deduct certain actual expenses if you think you will be able to achieve a larger deduction total. For most filers, the largest itemized deductions include mortgage interest, real estate and income taxes, charitable contributions and medical expenses. Obviously, then, having a mortgage can be a significant help toward increasing your deductions and lowering your taxable income.
Rental Income
The other way in which a mortgage can be a tax help is by using it to purchase rental property. For limited landlords, rental income is usually passive income, which is taxed differently than regular earned income (active income). This means that you will likely pay a lower tax rate for gains when you sell a long-term asset and you will not be subject to the self-employment tax.
If your rental doesn't make a profit when you start out, you can also generally take a loss of up to $3,000 against your other investment gains. The unused portion of your passive loss can be carried forward to use in future years... meaning that a loss in any one year could help your taxes for several years to come. The mortgage you take out to purchase or improve the property can also be used as a rental expense, lowering your profit for tax purposes.
While you certainly do not want to overstretch your budget too far to accommodate a mortgage payment, it can be beneficial in the long run. Childless taxpayers who aren't in school may have limited options when it comes to reducing their taxable income. In this situation, considering a mortgage either on a primary home or on a rental property can mean thousands of dollars in savings that can be put toward your future.
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