Tax Tips - Home Ownership

Buying a home is a great way to reduce your income tax. The qualified mortgage interest you pay and your real estate taxes are both tax deductible.

Claim the Mortgage Interest Tax Deduction
Mortgage interest you pay on loans up to $1 million ($500,000 Married Filling Separately) is tax deductible, provided you use the money to buy, build or improve your home and the loan is secured by your home.

Plus, interest you pay on loans secured by your home and used for a purpose other than to buy, build or improve your home is tax deductible for loans up to $100,000 ($50,000 Married Filling Separately). The limit may be reduced depending on the market value of the home at the time you take out the loan. Use equity lines of credit wisely. If you fail to make the payment, you put your home at risk.

If your income meets the requirements and your state and local government issues you a mortgage certificate credit, you may be eligible to claim a tax credit (the mortgage interest tax credit) based on the amount of interest you paid. If you claim the tax credit, you must reduce your interest deduction by the amount of the credit.

Deduct Loan Origination Fees
Finally, don't forget about points, also called loan originating fees. One point equals 1% of your loan. Points you pay (and even points the seller pays) when you purchase your home are generally tax deductible in full the year you pay them.

Alternatively, you may choose to amortize the points over the term of your mortgage. This choice is usually made only when you itemized deductions are less than the standard deduction for the year you bought the home.

Points paid to refinance your loan must be deducted over the term of the loan. If you deduct points over the term of the loan and sell the home or refinance it gain before the loan expires, you can deduct in the year of the sale or refinancing any points that you didn't previously deduct.

Mortgage Insurance Premiums
If you took out a first mortgage in 2007, 2008 or 2009, you may be able to deduct qualified mortgage insurance premiums you pay in connection with the loan. Qualified mortgage insurance is a mortgage insurance provided by the Veterans Administration, and Federal Housing Administration, or the Rural Housing Administration, and private mortgage insurance (as defined in section 2 of the Home Protection Act of 1998 as in effect Dec. 20, 2006). Prepaid mortgage insurance premiums generally must be deducted over the period to which they apply.

Gain On The Sale Of Your Home
When you sell your home, the IRS allows you to exclude gain on the sale from taxable income, up to $250,000 ($500,000 Married Filling Jointly and you both meet the use requirement.)

You can claim the exclusion if you own and use the home as your main home for the last 2 years during the 5-year period ending on the date of the sale. You may claim this exclusion only once in any 2-year period.

If you don't meet the 2-year requirement, you may be eligible to claim a reduced exclusion if you sell your home because of "unforeseen circumstances", such as a change in employment or a divorce. A loss on the sale of your home, however, isn't tax deductible.

If you used the home other than as your residence after 2008 (for example, as rental property), gain allocable to that use (nonqualified use) generally can't be excluded. The rule does not apply to:
Any nonqualified use before 2009
Any Period during the 5 year period that is after the last period of use as a principal residence.
A period of temporary absence of up to 2 years for reasons of health, employment and unforeseen circumstances.
Any period (not to exceed 10 years) during which the tax payer or spouse was serving on qualified official extended duty.