The subprime mortgage meltdown of 2008 has not diminished the tax advantages of home ownership in America. Ownership of a personal residence is still easily the biggest tax break available to individual filers who are able to afford this luxury. It is the only type of investment that offers both current and future tax breaks without having to be placed inside a tax-deferred account like an IRA. Here is a list of the major tax deductions available to homeowners in 2010. (For related reading, also check out 10 Sources Of Nontaxable Income.) IN PICTURES: 9 Ways To Use A Tax Refund
This is still probably the largest current deduction available to homeowners in America. Millions of homeowners write off billions of dollars of mortgage interest each year on their tax returns. Mortgage interest is reported to homeowners on Form 1098, which is issued by the mortgage lender. Homeowners then report this information in turn on Schedule A of the 1040. This expense alone is often enough to allow many taxpayers to itemize. (For more information, see Why You Should Itemize Your Tax Deductions.)
Real Estate Taxes
The taxes assessed on personal residences are another major expense that is reported on Schedule A as an itemized deduction. This tax is paid to the state in which the residence is located and is usually also reported by mortgage lenders on Form 1098. If not, then the state department of revenue website usually has this information.
Private Mortgage Insurance
Homeowners who have less than 20% downpayment must pay a form of insurance, known as private mortgage insurance (PMI) to insure that the remaining balance of their mortgage is paid in the event that they default on the payments. In some cases, PMI can add over a hundred dollars onto the monthly mortgage payment. For many years, this expense was nondeductible, but recent legislation has allowed taxpayers to deduct this cost as well. This makes all mortgage payments completely deductible for those who are able to itemize deductions, except for the portion that goes towards homeowners' insurance, if this is included with the mortgage payment.
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Tax-Free Capital Gains Treatment
This is far and away the largest capital gains tax break afforded to individual investors in the tax code. Homeowners can reap the first $250,000 of capital gain on the sale of their homes tax-free, and married couples who file jointly can rake in twice this amount. There used to be a set of somewhat restrictive rules placed upon the tax break for this sale, but subsequent legislation largely removed these restrictions, thus allowing virtually all homeowners to enjoy this benefit.
First-Time Homebuyers Tax Credit
This is one of the largest tax credits available in the tax code. First time homebuyers can take a credit of 10% off the purchase price of their house up to a maximum of $8,000 for the purchase of a home, and long-term residents can take a 10% credit of up to $6,500. However, these credits expired in April of 2010, so any homeowner who closed on their home purchase in May or later is ineligible to take this credit. However, some members of the U.S. military are still eligible to receive this credit until May of 2011. The credit is also disallowed on any home purchase that exceeds $800,000. (For related information, see The Truth About The First-Time Homebuyer Tax Credit.)
The Bottom Line
The American home is the only investment available in the tax code that offers current deductions, tax credits and tax-free treatment of capital gains. Most other types of investments get one or two of these breaks at most. Although buying a home now is more difficult than before, the tax advantages of home ownership still make it the American dream.
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