Home Ownership and Tax Benefits

Owning your home has many benefits including helping with your taxes. Many homeowners are excited when they learn that the mortgage interest they are paying can be deducted on their taxes.

If you itemize your deductions on Schedule A of your federal income tax return, you can more than likely deduct residence interest that you are paying on some home mortgage loans taken on your principal residence. This can even be used for second homes as well. If the loan is secured, you can deduct the interest that you paid for purchasing, building, or improving your home. This type of mortgage is called acquisition indebtedness by the Internal Revenue Service. There are many factors involved before you can deduct the interest.

An acquisition mortgage debt up to one million dollars and five hundred thousand dollars if you are married and file separately qualifies for interest deduction. There are different rules that apply, however if you debt was before October 14, 1987. Some interest that you pay on a loan if your home mortgage loan is over one million cannot be deducted.

This deduction applies to some home equity loans that are secured by your home however, the rules vary. Home equity debt involves a loan secured by your main or second home that exceeds the outstanding mortgages on the property.

Home equity debt is restricted to the lesser of the fair market value of your home minus the total acquisition debt on the home or $100,000 for your primary home and second home combined, or $50,000 if you file married filing separately. Usually the interest that you pay on a qualifying home equity loan is deductible no matter how you use the loan. You should read Publication 936 from the Internal Revenue Service to learn more.

Not only can you deduct your mortgage interest, but most of the time real estate taxes that you paid in the year that you are filing can also be deducted. However, only the legal owner of the property can deduct real estate taxes. If you pre-pay the taxes these can usually be deducted as well, this does not include taxes paid to an escrow account because they have not been paid to the taxing authority as of yet.

If you have done any type of repairs or improvements to your home, these are not usually deductible. Improvements as add-ons such as swimming pools, decks, etc... increase the value of your home and can increase the tax basis as well. Repairs do not add value they are just the cost needed to maintain, therefore are not considered improvements and usually are not included in the tax basis of you home.

When you purchase a home or refinance your mortgage loan there are fees such as attorney's fees, recording fees, title search fees, appraisal fees, and loan or document preparation and processing fees, and points that apply. The points are determined by the lending company and are usually 1 point for 1% of the loan amount. You can deduct these points in the year in which you purchase your home if you itemize on your return. There are requirements that you must meet before you can claim these points, and you may not be able to claim any of the other fees if they go toward the tax basis of your home. To find out more about the requirements in order to deduct these points you should read Publication 936 and Publication 530 from the IRS.

Selling your home at a loss will not give you anything to deduct on your taxes, however, selling your home with a profit you may be able to exclude from taxation all or part of the capital gain.

By meeting the requirements you can exclude from your federal income tax an amount up to $250,000 of the capital gain that you received from the sale of your primary home and $500,000 if you are married and file a joint return. Before you can qualify, you must have owned your home for the last five years and used it as your primary residence for two of those five years.

There are a few other rules that may also apply which include:

If the primary residence was used for business or contained a home office, if you sell that land is adjacent to the primary home, is the primary residence is owned by a trust, if you rented any part of the home to tenants, and if you own the primary home with an unmarried taxpayer.

It would be best before you deduct any of the above items on your return, to talk with a tax professional or your accountant.