Tax Help - Benefits of Owning Your Own Home

Buying a home is a great way to reduce your income tax. The qualified mortgage interest you pay and your real estate taxes are both deductible.

Itemizing Deductions

When you purchase a home, you're more likely to be able to itemize deductions on Schedule A. The following are more common itemized deductions not related to your home:

medical and dental expenses
state and local income taxes
personal property taxes (usually on your car)
gifts of cash and property to qualified religious and charitable organizations
casualty and theft losses
employment-related expenses
tax preparation fees
investment expenses
gambling losses to the extent of your winnings

Some of these deductions are subject to limitations, so follow the instructions for Schedule A carefully.

Claiming the Mortgage Interest Deduction

Mortgage interest you pay on loans up to $1 million ($500,000 if you're Married Filing Separately) is deductible, provided you used the money to buy, build or improve your home and the loan is secured by your home.

Plus, the interest you pay on loans secured by your home and used for a purpose other than to buy, build or improve your home is deductible for loans up to $100,000 ($50,000 if you're Married Filing Separately). The limit may be reduced depending on the market value of the home at the time you take out the loan. Use equity lines of credit wisely. If you fail to make the payments, you put your home at risk.

If your income meets the requirements and your state or local government issued you a mortgage certificate credit, you may be eligible to claim a credit (the mortgage interest credit) based on the amount of interest you paid. If you claim the credit, you must reduce your interest deduction by the amount of the credit.

Deducting Loan Origination Fees

Finally, don't forget about points, also called loan origination fees. One point equals 1% of your loan. Points you pay (and even points the seller pays) when you purchase your home are generally deductible in full the year you pay them.

Alternatively, you may choose to amortize the points over the term of your mortgage. This choice is usually made only when your itemized deductions are less than the standard deduction for the year you bought the home.

Points paid to refinance a loan must be deducted over the term of the loan. If you deduct points over the term of the loan and sell the home or refinance it again before the loan expires, you can deduct in the year of the sale or refinancing any points that you didn't previously deduct.

Gaining on the Sale of Your Home

When you sell your home, the IRS allows you to exclude gain on the sale from taxable income, up to $250,000 ($500,000 if you're Married Filing Jointly and you both meet the use requirement).

You can claim the exclusion if you own and use the home as your main home for at least 2 years during the 5-year period ending on the date of sale. You may claim this exclusion only once in any 2-year period.

If you don't meet the 2-year requirement, you may be eligible to claim a reduced exclusion if you sell your home because of an "unforeseen circumstance," such as a change in employment or a divorce. A loss on the sale of your home, however, isn't deductible.