Home Ownership Related Issues

Tax Benefits

When a person decides on a place to live, they must make a decision to either buy or rent. Quite often, people choose the option that is cheapest for them overall. However, not everyone takes the tax benefits of home ownership into account when making this decision. There are two ways that you may benefit by owning a home: the deductions taken on your return may be higher, resulting in a lower tax liability now and later on, upon the sale of the home, you may be eligible to exclude most if not all of the capital gain.

Itemized Deductions

The itemized deductions related to home ownership are: Real Estate Taxes; Home Mortgage Interest; Points Paid on the purchase of your home and Points Paid on refinancing your mortgage.

Real Estate Taxes
It is quite common for a state or local government to charge an annual tax on the value of real property within its jurisdiction. In order for these taxes to be deductible, they must be imposed in a uniform manner against all property (based on assessed value) in the jurisdiction and used for the benefit of the community or governmental purposes. Real estate taxes almost always meet this requirement for deductibility.

There are two ways to pay your real estate taxes: either your mortgage payment includes a portion that is paid into an escrow account and the mortgage company remits the payments to the appropriate authority in a timely manner or you pay the taxes to the appropriate authority directly, usually on a semi-annual basis. If you pay your real estate taxes directly, you will need to keep track of these payments for deduction purposes. However, if your mortgage payment includes a portion for real estate taxes, your mortgage company should give you an annual statement (Form 1098) notifying you as to the deductible amount for that year.

Home Mortgage Interest

Before we can discuss deductible mortgage interest let's first define what is a home mortgage. A home mortgage for tax purposes is any loan that is secured by either your primary residence or secondary home (usually a vacation home) including first and second mortgages, equity loans and refinanced mortgages.

For your average person, all of the mortgage interest is deductible. However, if the balance of your mortgage(s) is greater than $1 million, or if you took out the loan for a reason other than buying, building or improving your home, then your deduction will be limited. Figures A & B as well as Tables 1 and 2 from IRS Publication 936 detailing the limitations and deductibility of various forms of mortgage interest have been provided for your reference in Section IV.

Points

The term "points" is generic term used to describe loan origination fees, loan discounts, discount points and other forms of prepaid interest used to obtain a loan. They are usually found as a separate line item on your closing statement. Points are most often incurred on refinancing loans are deducted ratably over the term of the loan and not fully deducted in the year incurred.

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