From the time that our nation was founded, owning your own home has been considered the American Dream. Congress has given taxpayers several different tax credits and deductions that have effectively combined to make home ownership one of the most tax-advantaged investments in America. The tax breaks available to homeowners include the following:
Home mortgage interest deduction – Every year, homeowners who have mortgages on their homes receive a Form 1098 that breaks down the amount of deductible interest that they paid on their home loans and equity lines of credit for the year. This amount is reportable on Schedule A of the 1040, and many homeowners are able to itemize their deductions because of this expense. The only limitation is that interest is only deductible for the first million dollars’ worth of home loans.
Real estate tax deduction – This expense must be paid by all homeowners, regardless of whether or not they have a mortgage on their property. Most homeowners can now look up their property taxes online at their state or county treasurer’s website. This expense is also reportable on Schedule A as an itemized deduction.
Tax credits – Congress has authorized various types of tax credits over the years, such as the Home Buyers Tax Credit, which gave taxpayers a whopping $8,000 tax credit for those who purchased their first home. The Energy Saver’s Tax Credit also allowed homeowners to take a tax credit for certain types of energy-efficient upgrades to their homes. Unfortunately, most of these credits have expired at this point.
Tax-free capital gain on sale of home – This is perhaps the largest tax break afforded to homeowners. It is, in fact, one of the largest tax breaks given to individuals in the tax code, and effectively renders the price appreciation of your home as a tax-free benefit in most cases. Homeowners who file as Single or Head of Household are not required to report the first $250,000 of gain on the sale of their home. Married couples filing jointly can exempt twice that amount. This exemption is an expansion on previous legislation that allowed homeowners aged 55 or above to claim a one-time exclusion of $125,000 on the sale of their homes as long as certain conditions were met. But most of those restrictions have become obsolete. Homeowners of any age can now exclude all gains on any sale of their primary residence up to the aforementioned limits. Furthermore, this exclusion can be used multiple times, as long as it isn’t used more than once every two years. Homeowners must also have used the house they are claiming the exclusion for as their primary residence for at least two of the previous five years before the sale date.
This is just a general breakdown of the tax advantages that are available to homeowners and is by no means comprehensive and should not be taken as tax advice. For more information on the tax rules of home ownership, visit the IRS website at www.irs.gov or consult your real estate agent or financial adviser.