Many entrepreneurs are first-time homeowners. While that is an exciting period, it can also be both confusing and terrifying. Managing a business while learning the ropes of having a property can be difficult.
If you’re in this position, these x points will make things easier:
1. You Have to Pay Property Tax
A property tax or ad valorem tax is levied on personal property, such as real estate (e.g., land, house, or both). The person pays it to the state, not the federal government, which then uses the funds to finance their public services. These include schools, healthcare, and public road maintenance.
Tax rates can vary between states, and some can be lower than the national average. States like California and Florida have much lower percentages than the national average, which is 1.08%. However, the amount to be paid might be expressed in mill.
Usually, you pay this tax yearly. However, in some cases, it becomes monthly. It happens when lenders already include the payment to the total mortgage bill. The amount is normally an estimate, so you need to pay more in certain months.
The value of the property, which you multiply to the tax rate, depends on many factors. Some base it on the appraised value or the market value of the home.
2. But You Can Deduct Your Mortgage Interest to Your Taxable Income
The good news is you can deduct your property tax payments to your taxable income. Since 2018, the maximum deductions you can claim is $10,000. Note, though, that the amount already includes all you paid for deductible taxes on local and state levels.
Besides property tax payments, you can also reduce your tax liability with mortgage interest up to $750,000 of the principal amount. This is lower than the $1 million cap in the previous years, but it will revert to the latter by 2025. To qualify, the interest paid should be backed by personal property, such as a first or secondary home.
3. A Homeowners’ Insurance Is Optional but Necessary
Contrary to popular belief, a homeowners’ insurance policy is not mandatory. However, it doesn’t mean it is not essential. This is especially true if you’re living in disaster-prone areas, such as Florida and California.
Your choice for the best home insurance depends on your needs and budget. Some cover only the contents of the property, not the house itself. Others might pay your claim if the damage is caused by flooding or fire but not an earthquake or terrorist acts. Several companies bundle this with other insurance options such as life or auto (or both).
Many lenders offer you homeowners’ insurance to go with your mortgage. This setup has disadvantages, one of which is you won’t have the opportunity to select insurance firms that can offer you more affordable premiums and coverage. In the end, it can be ideal to get this separately and shop around.
4. If You Run a Business at Home, You Can Itemize Many Deductions
What do Amazon, Google, and Mattel have in common? These businesses began in their garages. True enough, about 16 million Americans are currently self-employed. Most run their services or companies in their home to save on rent and utilities.
Fortunately, the IRS allows you to deduct many of these business-related expenses to your taxable income, such as fuel, office supplies and equipment, and depreciation of business assets.
You can also deduct a portion of your mortgage or utility you used for the business. To determine the amount, you need to measure the space you converted into a home office or the length of time you used the Internet or the phone for company matters.
However, keep in mind that to take advantage of these deductions, you have to itemize them. This means you cannot claim a standard deduction, which has already increased to $12,400. In the end, determine which type of deduction gives you the bigger benefit.
5. You Need Not Pay Private Mortgage Insurance
Also known as PMI, this is coverage the homeowner pays, protecting the lender from defaults. It can be up to 2.25% of the total loaned amount annually, so some homeowners find this significant.
But new homeowners can avoid paying PMI. First, they can increase their down payment to over 3%. USDA loans do not charge this insurance either, although you need to meet its qualification for borrowers. For instance, you need to be ready to move to a rural area.
Knowing more about taxes and insurance coverage that can affect your mortgage and property can help you manage your finances more wisely.