Tax Benefits & Home Ownership
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Owning a home can help you save money by offering tax breaks via certain itemized deductions from your income tax. If you are renting a home, you cannot deduct the taxes paid on that property. These taxes can only be deducted by the property owner who is actually paying the taxes for the property.
What Tax Benefits Can I Get If I Own My Home?
There are many ways that owning a home can help you save money on taxes. The following are some ways in which owning a home can be to your advantage.
Interest Paid on a Home Loan
Interest paid on a home improvement loan or your first or second mortgage loan is tax deductible up to a maximum of $1million. This deduction is limited to a maximum of 2 mortgaged residences, but rental and business properties are not counted in the limit of 2. You may not be eligible for this deduction if your aggregate mortgage balance is more than $1 million, or $500,000 if married and filing separately. However, you can not use the $1 million deduction if you paid cash for your home and later used it as collateral for an equity loan.
You may also be able to deduct some of the interest paid on a home equity loan. You may deduct 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 (what your house would cost on the open market, less other debts against it). The IRS limits the amount of debt you can consider home equity for this deduction using very complicated rules.
Points are certain charges you pay to get a home mortgage. Points are also called loan origination fees, maximum loan charges, loan discount, or discount points. A point is 1% of your loan principal and a home loan is usually associated with 1 to 3 points which can total thousands of dollars. You can fully deduct points associated with a home purchase mortgage. If the points are paid to refinance a mortgage, the points will be deductible over the life of the loan.
Property/Real Estate Taxes
Usually your state or local government will charge a tax once you own a piece of real estate - this is called a real estate or property tax. Real estate or property taxes are fully deductible from your income. The tax you are charged must be for the welfare of the general public or for some public service.
If you move because you got a new job, you may be able to deduct some of your moving costs. To qualify for these deductions you must meet all of the following requirements, which get more and more complicated as you read on:
- You must move within one year of starting your new job.
- The distance between your old home and your new job is at least 50 miles greater than the distance between your old home and old job.
- You must work full-time at the new workplace for 39 of the 52 weeks following the move. If you are self-employed, you must work full-time for at least 39 weeks during the first 12 months and a total of 78 weeks during the first 24 months after arriving at the new job location.
- The distance between your new home and new job can not be greater than the distance between your old home and new job.
That means you can not make your commute longer than if you had not moved. An exception an be made if your new commute will save you time or money, or if your employer insisted on the move as a condition of your employment.
If you meet the requirements above, you can deduct the expenses of:
- Moving your household goods and personal effects (including in-transit or foreign-move storage expenses), and
- Traveling (including lodging but not meals) to your new home.
Gains From Selling Your Home
If you sell your home, you may be able to exclude the profit you make from being taxed. To be eligible for this deduction, you must have owned and lived in the property as your main home for at least 2 years during the 5-year period ending on the date of the sale of the home. A home can be a:
- Mobile home
- Cooperative apartment
If you are a married taxpayer (filing jointly), you can keep up to $500,000 in profit on the sale of your home. If you are single or married and filing separately, you can keep up to $250,000 tax free. This is also applicable to you if you are single and own a home jointly.
Do I Need A Tax Attorney To Get Tax Benefits?
Although the IRS has published literature on tax benefits at www.irs.gov, many rules are quite complicated and contain many exceptions. An experienced tax attorney will be able to determine what benefits you are eligible for and how you can fully take advantage of owning a home for tax purposes.
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Last Modified: 12-14-2011 04:36 PM PST
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