Owning a home has many benefits, especially in the world of taxes. Lucky for everyone, the government makes owning a home a taxpaying advantage.
Mortgage advantage: You can deduct all the interest up to a maximum of $1 million in mortgage debt secured by a first and/or second home. The maximums are halved for married taxpayers filing separately.
Note to remember: You can’t use the $1 million deduction if you pay cash for your home and later use it as collateral for an equity loan.
Point Advantage: A point equals 1% of the loan principal. 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.
Note to remember: Refinanced mortgage points are also deductible, provided they are amortized over the life of the loan. Homeowners who refinance can immediately write off the balance of the old points and begin to amortize the new.
Interest Advantage: Your total home equity debt 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, less certain other outstanding debts against it.
Home Equity Advantage: If you take out a loan to make sizeable home improvements, you can deduct the interest on this loan. There is no dollar limit on this deduction; nonetheless, the work must be a “capital improvement” rather than ordinary repairs.
Property Tax Advantage: Property taxes or real estate taxes are fully deductible from your income. You can’t deduct escrow money held for property taxes until the money is actually used to pay your property taxes. A city or state property tax refund reduces your federal deduction by a like amount.
There are also many tax advantages after the initial purchase of your home, such as home business, selling, capital improvements, moving costs, capital gains and other home owning tax advantages. Consult a professional to learn about your specific tax situation.
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