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Tax Benefits of Home Ownership

Tax Benefits of Home Ownership

As tax day is nearing, let’s freshen up on some of the tax benefits to homeownership.

1. Mortgage deductions

The tax code allows homeowners to deduct the mortgage interest from their tax obligations. For many people, interest payments can be the largest component of your mortgage payment in the early years of owning a home, resulting in a large deduction.

 2. Some closing cost deductions

When you buy a house, you may have to pay “points” to the lender in order to get your mortgage. This charge is usually expressed as a percentage of the loan amount. If the loan is secured by your home and the amount of points you pay is typical for your area, the points are deductible as interest as long as the cash you paid at closing via your down payment equals the points. Believe it or not, you get to deduct the points even if the seller paid them for you.

 3. Property tax is deductible

Real estate property taxes paid on your primary residence are fully deductible for income tax purposes.

4. Tax deductions on home equity lines

In addition to your mortgage interest, you can deduct the interest you pay on a home equity loan. This gives you the ability to shift your debts from credit cards onto your home equity loan. This is beneficial because then you aren’t paying as high of an interest rate and you get a deduction on the interest as well!

5. Tax-free profit on sale

Years ago, to avoid paying tax on the sale of a residence, a homeowner had to use the sale proceeds to buy another house. In 1997, the law was changed and we now have capital gains exclusions. To qualify for capital gains exclusion, you have to have owned the property for two years and lived in it for two of the five years before the sale. If you meet these qualifications and sell your home, you can keep profits up to $250,000 if you are single and up to $500,000 if you are married without owing any taxes. You can do this as often as every two years for the rest of your life.

6. Energy credits

Some energy-saving home improvements to your principal residence can earn you an additional tax break in the form of an energy tax credit worth up to $500. You an get a credit for up to 10% of the cost of qualifying energy-efficient skylights, outside doors and windows, insulation systems, roofs and qualifying air conditioners, heat pumps, furnaces, and water heaters. There is also a separate credit equal to 30% of the cost of more expensive energy-efficient equipment, such as solar-powered generators.

The Bottom Line

There are many tax deductions that homeowners can take advantage of. From mortgage interest deductions to property tax deductions, many tax benefits have persuaded potential homebuyers to buy homes.