James R. Kay, CPA

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The Tax Benefits of Home Ownership

There are several financial advantages that come with buying and owning a home, including some significant tax benefits.

Points

When you buy a home, you typically pay points, also called discount points or origination fees, to the lender (see lines 801 and 802 of your HUD-1 statement).  These points are considered pre-payment of the interest on your mortgage so they are tax-deductible.  A point is equal to 1% of the loan amount and a home loan will typically include one to three points, so this can add up to a sizeable deduction.  Depending on the purpose of the loan, you may be able to deduct all of the points in the year you paid them or you may have to deduct them over the term of the loan.

Mortgage Interest

You can also deduct the interest you pay on your mortgage each year for a first or second home.  This can be a big savings, since most of your payments for the first several years go primarily toward the interest.

Property Tax

You can also deduct property taxes paid from your escrow account, or paid by you directly, to the taxing authority during the year.

Home Equity Loans or Lines of Credit

If you have a home equity loan or line of credit for $100,000 or less (or $50,000 or less if you are married and filing separate tax returns), you may be able to deduct the interest on your taxes.  A home equity loan or line of credit lets you tap into the equity of your home and can be a great way to cover home repairs or pay off a high interest rate credit card.  It doesn't matter how you use the money; the interest may still be deductible.

Home Office Deduction

If you use part of your home as an office for your business, you may be able to deduct a pro-rata part of the maintenance costs, utilities, insurance and depreciation on your tax return.  Claiming a home office deduction will not impair your ability to exempt the gain from taxation when you later sell your home.

Tax-Free Gain on Sale of Home

When you sell your home, some or all of the gain may be tax-free if you have lived in the home for 2 out of the last 5 years.  Some limitations and exceptions apply, so talk to your accountant about your own situation.

Talk to Your Accountant

You should speak with your accountant to find out how you can take advantage of these tax breaks homeowners.

Caution - Content on this page is general in nature.  More specific rules and limitations may apply to your situation.  Always seek the advice of a tax professional before making important financial decisions.

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