The Tax Benefits of Owning a Home

This is the seventh post in my “Taxes for Your Family” series.

There is a lot of confusion about the tax benefits of owning a home. But what are they?

Itemize Deductions

There are several deductions available to homeowners who itemize on their tax return:

You can generally deduct the interest on up to $1 million of mortgage debt used to acquire or improve your first residence (and a second residence if you have one).
If you paid points to get a better rate on your loan, you may be able to deduct those too. Restrictions may apply, so check with your lender.
You may generally deduct the interest on up to $100,000 of home equity debt secured by your first (or second) residence.
Real estate taxes may be deductible as well.

How big is the deduction? According to a report from the Pew Charitable Trust, the average mortgage interest deduction among tax filers who claimed it was $10,084 in 2011.

Note that these deductions only apply to taxpayers who itemize deductions on their tax return. It only makes sense to do that if your itemized deductions are greater than the standard deduction.

Standard Deduction

For 2013, the standard deduction amounts are:

$12,200 for married joint-filing couples.
$8,925 if you use head of household filing status.
$6,100 for singles.

To further complicate matters, not all these deductions are available if you are subject to the AMT (Alternative Minimum Tax). AMT filers may not deduct property taxes, or home-equity loan interest unless the loan proceeds are used to acquire or improve your residence.

So, if you have a small mortgage and no other deductions, you may not reach the threshold for itemizing. Does that mean there is no tax benefit at all?

Capital Gains Exemption

Well, there is still a big benefit when your sell: the capital gains exemption.

Generally, as long as you lived in the home for 3 of the past 5 years, you may exclude the first $250,000 (or $500,000 for married filing jointly filers) of capital gains (aka profit) when you sell. That’s quite a chunk of tax-free income, which has contributed to the creation of a lot of wealth in this country.

In closing, don’t fret if the tax benefit of owning your home is less than you expected. Today’s low interest rates can mean less mortgage interest, which can mean less of a tax deduction. That’s okay – it is better to pay less in interest! And don’t forget that you could have a bigger benefit down the road when you sell.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Please note, changes in tax laws or regulations may occur at any time and could substantially impact each person’s situation. While we are familiar with the tax provisions of the issues presented herein, we are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. Links are being provided for information purposes only. The Stanich Group, LLC is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. The Stanich Group, LLC is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members.

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Sara Stanich

Founder at Cultivating Wealth

Sara is a CERTIFIED FINANCIAL PLANNER™ practitioner, Certified Divorce Financial Analyst, and founder of Cultivating Wealth.

She lives in Montauk, NY with her husband, 3 kids and Labrador puppy.