Every year, as the April deadline for filing federal income tax returns approaches, an income deduction scramble ensues. Claiming deductions from annual income means you have technically earned less money subject to government taxation. And everyone wants to pay less taxes!
There are a number of deductions that people can claim to minimize their taxable income and, thereby, keep much more of their hard-earned money where it belongs: in their own pocket! And, buyers of rent to own homes are keenly aware of this as they work toward gaining one of the largest tax deductions available: the home mortgage interest deduction.
In general, tax deductions include items involving qualified charitable contributions, education expenses, casualty and certain medical expenses that a taxpayer experienced during the year. The U.S. tax code encourages citizens to purpose portions of their income toward these activities. Some of these activities are by choice (such as making donations to your favorite charity). Others are due to necessity (such as casualty, or paying for catastrophic expenses). These deductions reduce a tax payer's taxable income, and in turn, reduce their tax liability.
But, most people who are not home owners cannot qualify to claim enough deductions to reduce their income beyond a standard allowable amount. A larger deduction is needed to qualify and this larger deduction usually comes in the form of mortgage interest expenses. This is a huge incentive to work out of renting and start owning your home!
The single, most frequently utilized tax deduction involves home mortgage interest and loan expenses. To the average buyer of rent to own homes, this deduction typically will also represent the largest dollar amount of all deductions available. This makes owning their home an even better value than renting. And that's a big reason why smart buyers are using home lease options and rent to own housing agreements to work toward their home purchase.
As a renter, 100% of every month's rent payment is a standard living expense. No tax deductions are allowed for money spent on rent. On a qualified home mortgage loan, however, the interest paid on the loan can be claimed by tax payers and ultimately reduce their taxable income substantially. Qualified mortgage interest paid each year can be hundreds, thousands, tens of thousands of dollars!
Say you're interested in rent to own housing that includes a rent to own house or a rent to own condo for your main residence. Once you finish your lease period, purchase your rent to own home and pay mortgage interest, is there a limit on the type of home you can use for a mortgage deduction? The answer is found on the IRS website, where they define the mortgage interest deduction to cover your main home this way: 'Your main home is where you live most of the time. It can be a house, cooperative apartment, condominium, mobile home, house trailer, or houseboat that has sleeping, cooking and toilet facilities.' That's a pretty wide selection of domiciles to benefit from this interest deduction!
Getting started in a home under a lease with an option to buy is the first step toward potentially saving thousands of dollars in tax deductions, year in and year out.
*Information in this article is considered informational and not tax advice. Consult IRS publications, a professional tax advisor or financial representative to understand your personal income tax situation and applicable income tax deductions.