 Owning your home not only allows you to build wealth through appreciation, but
it can also reduce the amount of income tax you pay every year. Here are some tax benefits for homeowners.
Deductions for loan fees
Typically, you can deduct the “prepaid
interest” you paid when you got your mortgage loan. That includes points, loan
origination fees, and loan discount fees listed on your settlement statement,
even if the seller paid those fees for you. Each time you refinance your home,
you can deduct prepaid interest fees.
However, you must meet certain requirements to take the prepaid interest
deductions when you purchase or refinance your home. Check with your
accountant to be sure you’re following the rules.
Property tax deductions
In the year you purchase your home, you’re
entitled to deduct the real estate taxes you paid at the closing table. You
can continue to deduct the property taxes you pay each year.
The mortgage interest deduction
Every year, you can deduct the amount of
interest and late charges you pay on your mortgage and home equity loans,
though there are limitations. If you’re required to purchase private mortgage
insurance (PMI) because you made a down payment of less than 20% on your home,
you can also deduct those premiums as mortgage interest expenses.
Home office expenses
If you have a home office you use only for
business, you may be eligible to deduct the prorated costs of your mortgage,
insurance, and other expenses related to that space. The government
scrutinizes home-office deductions closely. Be sure you’re entitled to the
deductions before claiming them.
The costs of selling your home
In the year you sell your home, you can deduct
the costs of selling it, including real estate commissions, title insurance,
legal fees, advertising, administrative costs, and inspection fees. You can
also deduct decorating or repair costs you incur in the 90 days before you
sell your home.
The gain on your home
If you lived in your home for at least two of
the previous five years before you sell it, the government lets you to take up
to $250,000 of profit on the sale of your home tax free. That amount is
doubled for married couples. This deduction isn’t available on rental or
second homes.
The government also allows you to subtract from your home sale profit any
amounts you spend on improvements, such as window replacement, siding, or a
kitchen remodel. Those deductions are in addition to the tax credits you can
receive in 2010 for making energy-saving upgrades. Money invested for routine
maintenance and repairs doesn’t count.
This article includes general information about tax laws and consequences, but
is not intended to be relied upon as tax or legal advice applicable to
particular transactions or circumstances. Consult a tax professional for such
advice; tax laws vary by jurisdiction.
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