The government tries to encourage home ownership through a variety of tax breaks. The mortgage interest deduction continues to be the favorite tax break for millions of American households. Tax codes and special homeowner incentives change every year, so keep track of new developments that might bring additional tax help.
You can't deduct any of the money you pay towards the principal mortgage debt, but you can deduct the interest you pay to the lender. During the early years of home ownership the bulk of your payments are towards interest, so this deduction is a solid tax break. The higher your tax bracket, the more the deduction is worth to you because the value of the deduction is based on your tax rate. If you have a home equity loan or line of credit, you can also deduct the interest on a debt of $100,000 or less if the debt is secured with your home as collateral. Mortgage interest on a second home or vacation property is also deductible.
If you paid points to lower your mortgage interest rate, you can deduct that money from your taxes, too. Deduct the points the year you pay them with an initial purchase. If you refinance with points, then deduct the points annually over the life of the loan. Private Mortgage Insurance (PMI) is not tax deductible unless your loan was originated or refinanced between January 1, 2007 and December 31, 2010 and meets certain dollar amount limits.
Uncle Sam and your state government spare you the pain of double taxation by allowing you to deduct your real estate taxes from your income tax. Since property taxes are a payment to your city or county, you’ve already done your tax duty. It doesn’t matter whether your property tax payments are escrowed along with your mortgage or if you pay them directly. Even if you take a standard deduction and don’t itemize you may still deduct a portion of your property tax. Cooperative apartment owners can deduct their share of real estate taxes.
When you sell at investment at a profit, you are subject to a capital gains tax. You might be familiar with this tax if you’ve ever sold stocks or mutual funds. The beauty of home ownership is that you can sell your primary residence at a profit without any capital gains tax on the first $250,000. If you’re married filing jointly, you each get a $250,000 exclusion for a total of $500,000. You must have owned your home for at least two years and have lived in it for two out of the five years prior to the sale to qualify. Just don’t plan on buying then selling another primary residence within the two years after the sale, or you’ll lose the exclusion.
Special Tax Breaks
From time to time federal and local governments give special tax breaks to homeowners. In 2009 the U.S. government tried to stimulate the depressed housing market by offering a one-time tax credit to home buyers. A variety of energy tax breaks have been offered over the years for greening your home with solar panels, energy-efficient appliances, replacement doors and windows or installing LED light bulbs. Make sure you save all receipts and paperwork for when you file your taxes, and check with the IRS every year for current tax incentives.
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