Your Home as a Tax Shelter

Top Tax Deductions for Owning Your Home

Your home provides many tax benefits -- from the time you but it right on through to when you decide to sell. Here is a summary; for details, visit the IRS website at www.irs.gov.

-Mortgage interest: If you are filing jointly, you can deduct all your interest payments on a maximum of $1 million in mortgage debt secured by a first or second home. The maximums are halved for married taxpayers filing separately.

Learn more from IRS Publication 936, Home Mortgage Interest Deduction, available at www.irs.gov.

-Points: Your mortgage lender will charge you a variety of fees, one of which is called "points," calculated at 1% of the loan princpal. One to three points are common on home loans, which can easily add up to thousands of dollars. You can fully deduct points associated with a home purchase mortgage. Refinanced mortgage points are also deductible, but only over the life of the loan, not all at once.

-Equity Loan Interest: You may be able to deduct some of the interest you pay on a home equity loan or line of credit. However, the IRS places a limit on the amount of debt you can treat as "home equity" for this deduction. Your total is limited to the smaller of:
-$100,000 (or $50,000 for each member of a married couple if they file separately), or
-the total of your home's fair market value -- that is, what you would get for your house on the open market -- minus certain other outstanding debts against it.
IRS Publication 936, Home Mortgage Interest Deduction, available at www.irs.gov, explains the details.

-Home Improvement Loan Interest: If you take out a loan to make substantial home improvements, you can deduct the interest, with no dollar limit. However, the work must be a "capital improvement" rather than ordinary repairs.

Qualifying capital improvements are those that increase your home's value, prolong its life, or adapt it to new uses. For example, qualifying improvements might include adding a new roof, fence, swimming pool, garage, porch, built-in appliances, insulation, heating / cooling systems, landscaping, or more. (Keep in mind that increasing the square footage of your home could trigger a reassessment and higher property taxes though)

-Property Taxes: Often referred to as "real estate taxes," property taxes are fully deductible from your income. If you have an impound or escrow account, you can not deduct escrow money held for property taxes until the money is actually used to pay your property taxes. And a city or state property tax refund reduces your federal deduction by a like amount.

-Selling Costs: If you decide to sell your home, you will be able to reduce your taxable capital gain by the amount of your sellings costs.

Real estate broker's commissions, title insurance, legal fees, advertising costs, administrative costs, and inspection fees are all considered selling costs. In addition, the IRS recognizes that costs ordinarily attributed to decorating or repairs -- painting, wallpapering, planting flowers, maintenance, and the like -- are also selling costs if you complete them within 90 days of your sale and with the intention of making the home more saleable.

All selling costs are deducted from your gain. Your gain is your home's selling price, minus deductible closing costs, selling costs, and your tax basis in the property. (Your basis is the original purchase price, plus the cost of capital improvements, minus any depreciation)

-Capital Gains Exclusion: Married taxpayers who file jointly now get to keep, tax free, up to $500,000 in profit on the sale of a home used as a principal residence for two of the prior five years. Single taxpayers and married taxpayers who files separately get to keep up to $250,000 each tax free.

-Moving Costs: If you move because you got a new job, you may be able to deduct some of your moving costs. To qualify for theses deductions you must meet several IRS requirements, including that your new job must be at least 50 miles farther from your old home than your old job was. Moving cost deductions can include travel or transportation costs, expenses for lodging, and fees for storing your household goods.