There are many benefits of owning your own home. From having a safe place for you and your family to relax, to building equity, to owning a solid asset to pass down to the next generation. All are very compelling reasons to become a homeowner. The best part about owning your own home, however, is the myriad of home ownership tax deductions. These home tax deductions are simply not available to renters, and they are designed by the government to encourage home ownership. This article will touch upon the major tax benefits to owning a home.
Mortgage Interest Deductions
The most talked about of the home tax deductions is the mortgage interest deduction. You may be shocked to look at an amortization table for your first home mortgage and see that nearly 90% of every payment for the first 10 years goes to interest payments. Out of a hypothetical $1,200 monthly payment, nearly $1,050 would be applied toward interest with the remainder being divided among principal, taxes and insurance. Fortunately, this percentage ramps up in the later years of the term, but what a shock!
The good thing about this is that this interest is tax deductible. What this means is you can deduct the amount paid in mortgage interest on your primary residence from your income on your Federal Tax Return. This can effectively lower the taxes you need to pay substantially. In the most perfect of situations, it can lower your tax bracket, creating a solid savings.
Property Tax Deductions
Another tax benefit of owning a home is property tax deductions. Generally, the property taxes you pay to the local authorities are tax deductible. Although it's important to keep in mind, this can be a tricky area. The IRS publication 530 explains the ins and outs of property tax deductions for homeowners. It's available free on the web, just do a Google search. It is also critical to consult a tax professional prior to filing your tax returns. This way you can be certain you are getting the maximum home tax deductions and doing everything correctly.
Capital Gain Exclusions
This is perhaps the most exciting tax benefit for owning a home. When you sell your home, at a profit, the profit is yours to keep without having to pay capital gain taxes. The rule states that as long as you live in your home for two of the past five years, an individual can earn up to $250,000 or a couple can earn up to $500,000 profit from the sale before having to pay capital gain taxes. You'd be hard-pressed to find another investment that provides such a powerful capital gain exclusion.
The Bottom Line
There are many tax deductions that only homeowners can take advantage of. From mortgage interest deductions to property tax deductions, many tax benefits have persuaded potential homebuyers to buy homes.