(Real estate professionals, the economic news ain't all bad! Take time to educate homebuyers (and sellers) about the benefits of today's economic and tax environment with this sincere and timely email (or letter) to your prospective clients. Title agents, send this to your customers!)
Dear My Prospective Client,
I know this might not seem like the best time to buy your next home but as an experienced real estate professional who understands the economic environment, I want you to know why today might be one of the best days to call me.
Financing a home purchase in a higher interest rate environment might not seem advantageous at first glance due to the higher monthly payments and increased total cost of borrowing. However, there are several tax advantages and considerations that can make financing a home under these conditions more beneficial than one might initially think:
- Mortgage Interest Deduction: This is one of the most significant tax advantages of financing a home. The interest you pay on your mortgage is tax-deductible, up to a limit of $750,000 of indebtedness for tax years 2018 onward (for married filing jointly) under the Tax Cuts and Jobs Act (TCJA). In a higher interest rate environment, your mortgage interest payments are higher, thus potentially increasing your deduction. This can provide a substantial tax break, especially in the early years of the mortgage when interest makes up a larger portion of each payment.
- Real Estate Property Taxes: You can also deduct property taxes paid on your primary residence and vacation home, up to a combined total of $10,000 ($5,000 if married filing separately) along with state and local income taxes or sales taxes.
- Points Deduction: If you pay points to obtain your mortgage, these points are tax-deductible as prepaid interest. This deduction can be taken in the year paid if the loan is to purchase or build your primary residence and meets other certain conditions. In a higher interest rate environment, buying points to lower your rate might make more sense, and thus, the deduction can be more valuable.
- Home Equity Loan Interest: Interest on a home equity loan or line of credit is deductible if the loan is used to buy, build, or substantially improve the taxpayer’s home that secures the loan. With higher interest rates, the cost of borrowing against home equity can be higher, but the related tax deduction can partially offset this.
- Capital Gains Exclusion: While not directly related to the interest rate, when you sell your home, the capital gains on the sale are exempt up to $250,000 for single filers and $500,000 for married couples filing jointly, provided you've lived in and owned the home for at least two of the last five years. In a rising interest rate environment, home prices might increase more slowly, but the long-term appreciation can still offer significant tax-free gains.
- Increased Tax Deductions Over Time: Although this is not a direct tax advantage, in a higher interest rate environment, the ability to lock in a fixed-rate mortgage means that over time, as your income presumably increases, the effective cost of your mortgage payments decreases relative to your income. The tax deductions from mortgage interest and property taxes remain, which can lead to a more favorable tax situation as you progress through your career.
It's essential to consult with a tax professional to understand fully how these tax advantages apply to your specific situation. Tax laws change, and personal circumstances can significantly affect the benefits of these tax advantages.
Call me and I'll answer your questions. I'm here for you!
Your Real Estate Professional
