Tax Benefits of Home Ownership
Right At Home
Daily: Take It And Run: Getting Organized
By Jim Sulski for Right at Home Daily
Think the government is greedy? Think again,
especially when it comes to owning a home. To own a home is one of the few things
you can use and earn a profit from, in addition to receiving substantial tax
benefits. These benefits kick in when you buy a home, carry a home mortgage,
pay your annual real estate property taxes, and sell your home.
Here's how it works: When you purchase a home,
the interest you pay on your mortgage can be deducted from your federal income
tax for the year and in most cases will also help lower your state income taxes.
This deduction could lower your housing costs as much as one-third.
What else is deductible from your federal income
tax form?
If you itemize your expenses on your tax form,
when you purchase a home you often can deduct loan discount points and origination
fees in the year of purchase. During the life of the loan, you can deduct the
interest you pay on the mortgage. For a new homeowner, this can be a sizable
benefit because the monthly house payment is mostly interest in the early years.
If you take out a home equity loan, or a second
mortgage for a vacation home, you may deduct that interest on loans of up to
$100,000.
Even better than deductions, when you sell your
home you can take the first $250,000 in profits (up to $500,000 if you're married)
tax-free as long as you and your spouse have lived in the house (as your primary
residence) for two of the past five years.
TAKE IT AND RUN
1. Mortgage interest may be deducted on home
loans of up to $1 million. Deductions on home equity loans are limited to loans
of up to $100,000. While this sounds good, your ability to deduct declines once
your annual family income tops $160,000.
2. Don't pay more just to get the write-offs.
Shop for the lowest interest rate.
3. If your profit exceeds the $250,000/$500,000 levels,
you may owe capital gains tax. If you've owned the home for at least 12 months,
you'll pay 20 percent if you're in the 28 percent tax bracket or above, or 10
percent if you're in a lower bracket.
4. Don't pay more than you have to: Your capital
gains can be decreased by what you paid for capital improvements in the home
(such as a new roof or siding, a room addition, a new water heater, new electrical
or other upgrades), the cost of purchase and the cost of sale.
