Rental rates are currently skyrocketing across popular U.S. cities. San Francisco is the most glaring example of a modern day housing crises. The West Coast city is a favorable area for living, as it's right by the ocean and approximately an hour drive away from Silicon Valley. You'll often find employees from some of the most well-known Internet and technology companies residing in the Bay City.
Apartment demand has skyrocketed so much that San Francisco now has the highest rent for a one bedroom apartment in the U.S. New York City and Boston round out the top three. Cities with high rent typically have other expensive services as well, such as food and child day care. The San Francisco Chronicle recently reported that a family of four would need $200,000 to live comfortably in the city. In many smaller markets, that amount would be enough to put a down payment on a house and afford a mortgage, among other obligations.
In fact, owning a house entails many economic benefits renters will never see. Those who rent are, in a sense, putting money in their landlord's pockets. According to Maximum Exposure Real Estate's Bill Gassett, there eight tax advantages of owning a home.
These advantages present renters with an important decision: do they continue to pay high rents in a city they admire, or do they move, buy a house and reap the financial advantages of home ownership? For some, the answer is easy. However, as the housing market picks up and interest rates still remain low, there is no better time to purchase a house.
Taxes are one of the few guarantees in life and often have a love-hate relationship among citizens. No one likes seeing federal, state and city tax deductions from every paycheck, but those pale in comparison to property taxes. If you buy a home, brace yourself for paying a property tax - there's no way around it. The yearly amount will depend on your property's assessment, according to Gassett.
Property taxes do offer benefits. You can deduct them from your yearly tax filing, which in many cases is a few thousand dollars. However, the benefits of property taxes are those you may not think about all the time. According to the San Francisco Chronicle, property taxes typically go toward the police department, your local school district and street maintenance. Depending on where you live, taxes may also help pay for curbside garbage pickup.
According to Bankrate.com, mortgage interest is the largest tax break you'll receive as a homeowner. Most of your monthly payments will be used to pay off interest. The good news is that all the interest is tax-deductible, as long as your loan is less than $1 million.
Gassett wrote that much of the interest on mortgages is paid up-front, and in most cases, 2/3 of monthly payments are applied to to interest. For example, say you took out a mortgage for $300,000 over a 30 year period at fixed-rate loan of 4 percent. You'll likely pay approximately $11,000 in the first two years toward interest. Assuming you are in the 25 percent tax bracket, you can deduct $2,750 off your yearly taxes. Any break of that amount will surely be appreciated by homeowners.
Home office deductions
Believe it or not, you can receive tax deductions by claiming a home office. However, you can't file this deduction by working remotely one day of the week, as the Internal Revenue Services has specific guidelines. According to the IRS, there are two requirements for your home office to qualify for a yearly tax deduction:
- Regular use
- Principal place of your business
With regards to the first requirement, if you work out of an extra room in your house, you'll likely qualify for the deduction. The second requirement states that your home must be where you substantially conduct business. For instance, if clients or meetings regularly happen in your house, you can deduct expenses for the part of home used most often. Likewise, if you operate out of a free-standing structure, such as a garage or barn, you can also deduct expenses.
However, Gassett warned there is a high audit rate for those who claim deductions for home offices.