As you determine whether to continue renting or buy a home, keep in mind that the U.S. tax code provide a number of incentives for home ownership.
Tax incentives exist for nearly every step of the home ownership experience, from buying to selling. Because doctors and other medical professionals earn more than typical taxpayers and own more expensive properties, the benefits can be even greater for those in the field.
Although these tax incentives apply to federal income taxes, keep in mind many of them also apply to your state and local tax bill.
You may be able to take advantage of common deductions for expenses you incur the tax year you buy and move into your home.
Most notably, you are allowed to deduct any points you pay at closing for physician loans. Points are essentially an optional fee you pay upfront to receive a slightly lower interest rate. The IRS considers them a form of mortgage interest, which is tax deductible under most circumstances. Therefore you are allowed to deduct your points in the tax year you paid them.
A point is usually equivalent to 1 percent of the mortgage loan amount at the time of purchase. So if you borrow $300,000 and elect to pay one point at closing, that will increase your closing costs by $3,000. That $3,000 will be tax deductible when you file your taxes.
Once you own your home, many of the expenses you incur are tax deductible, provided you continue using it as a primary residence.
One of the most substantial deductions for physicians is the interest they pay each year on their physician mortgage loan. The IRS allows homeowners to deduct all the mortgage interest they pay, provided the amount borrowed to buy the home is $1 million or less (that applies to both single filers and married taxpayers filing a joint return. If you’re married and filing separately, the limit is $500,000). If you borrow more than $1 million for a home, you can still deduct the interest paid on the first $1 million in debt.
You can also deduct the property taxes you pay each year on your home. This includes real estate property taxes paid on your primary residence and a vacation home.
Your mortgage company will send you a Form 1098, Mortgage Interest Statement, when it’s time to file you taxes. It will include the total amount of interest you paid during the year. If the mortgage company has established an escrow account to pay taxes and insurance, the statement will also include the amount of property taxes you paid.
If any part of your practice occurs from your home, you may be able to deduct some of your home office expenses. You will have to determine how much time you spend working from home and how much of the house’s space is dedicated exclusively to your practice. From there, you can deduct an equivalent portion of your utilities, internet service, and other eligible expenses.
In addition to the interest paid on the mortgage acquired to buy your home, you can deduct the interest on up to $100,000 of debt you pay for home improvement loans, home equity lines of credit, or mortgage refinancing, regardless of how you use the funds.
Many investments such as stocks, mutual funds, and commercial real estate, are subject to capital gains taxes. When you sell the investment, you will owe state and federal taxes on the capital gain amount, which is the difference between the sale price and the total amount of money you invested.
For example, if you bought stock in a company worth $5,000 and sold it a few years later for $12,000, you would owe capital gains taxes on the $7,000 profit in the year you made the sale.
Selling your home is different in that there a capital gains exclusion of $250,000 for single filers and $500,000 for married tax filers. That means as long as the profit from the sale of your home falls under these thresholds, you do not owe any tax on the gain. To claim the exclusion, you must also have lived in the home for at least two of the five years prior to the sale.
While the tax code offers many incentives for home ownership, it doesn’t allow deductions for all expenses. A few items that you will not be able to deduct include:
- Your homeowner’s insurance
- Home repairs and improvements (though when it comes time to sell, the amount of money you used to make improvements can count as money invested, which will reduce your capital gain. This is important if there’s a chance you will sell your home for more than $250,000 ($500,000 if married) above what you paid.)
- Homeowners association dues
- Additional principal payments you make
- Depreciation of your home
- General closing costs
- Local assessments to increase the value of your neighborhood, such as new sidewalks or utility connections
Colin is the Founder & CEO of LeverageRx, an online lending and insurance marketplace for doctors. Colin has over 10 years of experience in financial services and is a licensed life and health insurance agent.