Homeownership Tax Benefits
Owning a home has many advantages—especially at tax time. Here’s a quick guide to homeownership tax benefits.
Mortgage interest is deductible
Unless you pay cash for your home, you’ll need a mortgage. Your monthly mortgage payment consists of principal (what you owe on the house) and interest (what you pay the lender to borrow the money). To encourage homeownership, the federal government lets you deduct the interest amount of your mortgage, dollar for dollar (instead of a percentage).
For example, let’s say your annual salary is $100,000. Your monthly mortgage payment is $1,200, and the interest portion of that payment is $1,000. At the end of the year, you’ll have a $12,000 tax deduction. In effect, that means your taxable income is $88,000.
You can deduct capital gains
When you sell your home, you get another tax break. If you buy your home for $200,000 and sell it for $400,000, you have a $200,000 gain. That’s considered income.
If you have an income by way of a job, a contract position or the sale of stock or mutual funds, you pay income tax on that gain. With homeownership, it’s different. If you’re single and lived in the home for at least two of the past five years, you don’t need to pay income tax on that $200,000 gain. In fact, you don’t have to pay on any gain up to $250,000. Married couples filing tax returns jointly and following the same owner occupancy guidelines are exempt up to $500,000. Where else can you generate income without paying taxes on it?
You can get tax credits for moving
If you purchase a home in one state and sell one in another, you should check with a CPA in both states. There may be benefits realized in one state but not the other, such as tax credits for moving expenses, if the move is a part of a job transfer. Also, for the year you’re between states, you’ll likely have to file a return in each state. It’s always smart to check with a CPA before a real estate transaction.