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Tax Benefits of Home Ownership


Some benefits of home ownership are obvious: there’s the investment value, the pride of ownership, the privacy… What you might not have realized is that the tax benefits are one of the greatest benefits to owning a home.

In fact, many of the costs associated with owning a home are tax deductible. This fact alone can make owning a home can be more affordable than renting in the long run.

Mortgage Interest Deduction

One of the largest tax benefits of home ownership is that mortgage interest is tax deductible.

As you probably know, part of your monthly mortgage payment includes interest paid to your lender. Shortly after the first of each year the lender will send you a statement showing the total amount of interest you’ve paid for the previous year. This mortgage interest is tax deductible, up to a maximum of $1 million, if filing taxes jointly.

Private Mortgage Insurance on FHA Loans

If you have an FHA loan which requires the payment of private mortgage insurance (PMI), you can write off a percentage of the PMI on your taxes each year, depending on your income. Even the interest from cash pulled out through refinancing can be deducted from tax liabilities. The IRS states that late payment charges on mortgage payments and mortgage prepayment penalties are also tax deductible.

Mortgage Points

Points, which are often paid to a lender at closing in order to reduce the amount of interest paid on a loan, are fully tax deductible, as long as the home is your primary residence. One point is equal to 1% of the loan amount and you may pay 1 to 3 points at close of escrow. Though you may end up paying $3,000 to $9,000 in points on a $300,000 home, the amount you pay will lower your tax liability greatly.

Property Taxes

Even property taxes, which you may pay several times a year, (or monthly into an impound account) can be deducted from your taxable income. If you pay a small amount of property taxes into an impound account every month and your mortgage company pays the taxes for you, you can only deduct the money once it is used to pay the property taxes; not while it is sitting in the impound account.

Home Office Deduction

If you ever have a home office or run a business out of a portion of your home, you can actually write off some of the living space as well as a percentage of the space’s portion of insurance and repair costs. Before taking the home office deduction, however, consult with a tax advisor. There are strict rules governing this deduction, and taking it may increase your chances of being audited. That said, you should take the home office deduction if you are entitled to it.

Home Sale Expenses

If you decide to sell your home and upgrade to something better, you can deduct some of the costs associated with selling the house. Advertising expenses, title insurance, inspection costs, and even your real estate agent’s commission are all tax deductible when selling your home.

Capital Gains Exclusion

After you’ve made the sale, the capital gains exclusion may benefit you greatly. The capital gains exclusion states that single individuals who sell their houses may keep up to $250,000 of the profit, tax-free. If you’ve made major home improvements, such as landscaping, these expenses may be added to the original purchase price of your home when calculating the profit you made on the sale. Married couples who sell their home may keep $500,000 of profit without being taxed on the gains. The capital gains tax exclusion applies as long as you have lived in the property for at least 2 out of the past 5 years.

Once you own a home, it’s a good idea to find a good Certified Public Accountant (CPA). You can ask friends or family members for referrals or search online and read reviews. Bringing your closing statement and mortgage information to the CPA will help him find all of the possible tax deductions for which you qualify, come tax time. As the old saying goes, “It’s not about what you make; it’s about what you keep.”

For more, read the IRS publication Tax Information for Homeowners.

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About Sarah Davis

Sarah Davis is a real estate broker in San Diego, Calif. She enjoys helping both buyers and sellers and was voted one of the top 10 best real estate agents in San Diego in 2013 by Union Tribune readers. In her spare time she talks about real estate on a local radio show and manages her website RealtorSD.com.

Comments

  1. Buying property in general, is a great investment. This article is right on the money discussing not only the investment benefits but the tax benefits as well.

  2. “The IRS states that late payment charges on mortgage payments and mortgage prepayment penalties are also tax deductible.” — It seems wrong the government will “give” you money back if you make late payments.

  3. Johanna says:

    Funny, I always thought the thing about taxes was not how much you were taxed, but how the government used it on our behalf…