Tax Benefits of Home Ownership

With tax day quickly approaching, I want to give a quick overview of the tax benfits of homeownership–perhaps when you see that big check you’re writing to the IRS you’ll start exploring that home ownership idea again!

Most people know there are financial benefits to owning over renting, including the deduction of mortgage interest. But few people really understand how to calculate that savings, and fewer are aware of some of the other financial benefits and tax incentives. I’ll cover rules of thumbs on how to calculate the tax-deductibility of interest in a future post, but I’ll lay out here a few of the less commonly discussed tax benefits.

Buying a home provides lots of deductions. Mortgage interest (up to $1 million on a first and second home, subject to certain limitations), as well as real estate taxes. Points paid in connection with a mortgage to purchase, construct, or improve your main home are also tax deductibe. Seller-paid points are deductible, too, but the amount deducted reduces your home’s basis.

Basis is the amount you’ve spent on your home. It includes the purchase price, plus improvement costs (though not repairs) you incur while you own it. Minor repairs don’t need to be tracked, but improvements which are more permanent in nature (likely to last beyond one year), should be carefully tracked and receipts kept. If you make the same improvement more than once, only the most recent ones adds to your basis. Receipts and records of improvements such as: Room additions, fences, exterior lighting, storm windows/doors, wiring upgrades, built-in applicances, new carpets, bathroom and kitchen upgrades, landscaping, security systems, roofs, HVAC systems, lighting fixtures, water heaters, insulation, and flooring should be catalogued and added to the basis of your home.

When you do sell, if you’ve lived in the property 24 of the last 60 months (note: you do not need to own the property for 60 months), then $250,000 of profit ($500,000 if you’re married) are tax-free. Yes, tax-free! How many other investments do you know that the federal government doesn’t tax?! And you don’t even have to “roll over” the profits into another home (though many people do.) To calculate your gain, subtract your basis (purchase price + improvements) from the net sales price (sales price net of selling costs like commissions). So tracking receipts can save you big bucks on taxes if you’re close to the threshold.

As an aside, unfortunately, a loss on the sale of your home is not tax dedcutible, so you’re on your own for that one. So if the value of your home (less selling expenses) is not enough to pay off your mortgage, the government is not going to help subsidize that loss.