Tax Benefits of Homeownership
Buying a home can result in a big tax break every year, among other benefits.
In terms of investments, purchasing a home is probably the biggest one you will
ever make. Moreover, it can be the wisest, due partly to a number of tax
advantages the government has instituted to encourage homeownership. These
benefits can help reduce the cost of buying and owning a home and leave you
with more money when it's time to sell. Because tax rules vary based on income
and other factors, you should consult an accountant or financial advisor for
advice on your particular tax situation.
Deducting mortgage interest
One of the biggest incentives to owning a home is that the interest you pay on
your mortgage is tax-deductible, up to a limit of $1 million. This deduction,
like most other tax breaks for homeowners, applies to any kind of home. That
includes a second home, as long as you spend a certain amount of time there:
either 14 days each year, or 10% as much time as it's rented.
In addition, you can deduct the interest on up to $100,000 of other debt that
uses your home as security such as a home equity loan. However, the amount you
can deduct may be limited if the money you borrow raises your debt above the
home's actual market value. This can sometimes happen when a lender extends you
a loan based on more than the value of the house.
You can also deduct any amount you pay for points to reduce the interest rate of
your mortgage or other loan linked to your home. In most cases, the points on a
mortgage to buy or build your principal home can be deducted fully in the first
year. However, if you refinance, take a home equity loan, or a loan secured by
a second home, the points must be deducted over the life of the new loan. The
exception is if you use part of a refinanced mortgage to improve your house;
that portion of the points can be deducted in the same year.
Tax-free profits
Another major advantage of homeownership is that, in most cases, you
don't have to pay taxes on any profit you make when you sell your home. The law
allows you to exclude from taxes up to $250,000 in profit from the sale of your
principal home -- $500,000 for a couple who file jointly. This exclusion also
covers the sale of a parcel of land adjacent to your house, unless it's used
for business.
There are some stipulations, however. The home must be your principal
residence, and you (and your spouse, where applicable) must have lived there
for at least two of the previous five years. You can only claim the exemption
once every two years. If you don't meet those requirements, you may still claim
a partial exemption if the sale was due to a change in your place of
employment, necessary for health reasons, or due to other unforeseen
circumstances.
Don't forget property taxes
You can claim property taxes you pay as an income tax deduction. This
applies to both your principal home and any others you may own. Any money held
in escrow to pay future taxes, however, is not deductible.
Write off your moving costs
The government allows you to write off many of your moving costs when
you buy a new home if it's at least 50 miles closer to your job than your old
home. To qualify, you must continue to work full-time in the general area of
your job for 39 weeks during the following year. If you're self-employed and
work in your home, any move of 50 miles or more will make your moving expenses
deductible. However, you must also work full-time near the new location for 78
weeks during the next 24 months.
Of course, because tax rules vary based on income and other factors, be sure to
consult an accountant or financial advisor about your particular situation.
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