Tax Benefits of Homeownership

Owning real estate can make tax season more complex, but many homeowners receive considerable benefits — especially if they sold a home or relocated for a job in the previous year. Here’s a look at three ways homeownership can pay off at tax time.

Mortgage interest

When you purchase a home, you will likely get a mortgage. Your monthly mortgage payment is made up of both principal (paying money to pay down the loan) and interest (what the lender charges for supplying the loan). As a way to incentivize homeownership, the federal government provides a tax benefit when it comes to the interest portion of your mortgage payment.

A homeowner can write off, dollar for dollar, the interest portion of their mortgage payment. Say, for example, a homeowner’s annual salary is $100,000. Their mortgage payment is $1,200 per month, and the interest portion of that payment is $1,000. At the end of the year, they have a $12,000 tax write-off. In essence, their taxable income is reduced to $88,000.

Capital gains

Homeowners also get a tax break when they sell their home. If you purchase your home for $200,000 and sell it for $400,000, you have a $200,000 gain — that’s income.

If you have an income by way of a job, a contract position or the sale of stock or mutual funds, you pay income tax on that gain. With homeownership, it’s different. If you are single and lived in the home for at least two of the past five years, you do not have to pay any income tax on that $200,000 gain — in fact, you don’t have to pay on gain up to $250,000. Married couples filing tax returns jointly and following the same owner occupancy guidelines are exempt up to $500,000. Where else can you generate income without paying taxes on it?

Tax credits for moving

If you purchase a home in one state and sell one in another, you should check with a CPA in both states. There may be benefits realized in one state but not the other, such as tax credits for moving expenses, if the move is a part of a job transfer. And, for the year you are between states, you will likely need to file a return in each state. It’s always smart to check with a CPA before a real estate transaction.

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