Almost Too Good to Be True - Tax Benefits of Home Ownership

Uncle Sam helps you in three ways when you own your home.
1. Purchase - When you buy your home, most of the cost are not tax deductible. But there is one exception that is worth finding. The IRS says you can deduct interest in the year that it is paid, and that is usually part of each monthly payment.
Also, if the day you purchase is on any day other than the first of the month, you will likely pay a fee for "daily interest" between the day of closing and the end of the month. Look on line 901 of your settlement statement (HUD). Much more importantly, the IRS says that, in most cases, loan discount points and origination fees are tax deductible to the buyer, regardless of who pays them. Look at lines 801 and 802 of your settlement statement and see if you hit the jackpot. This is a particularly unusual deduction because you get the benefit even if the seller paid all the closing costs. And because origination fees of 1% and more are common, this can add up to a lot of cash.

2. Mortgage Interest - In general, you can deduct interest charged on a loan used to acquire or improve your principal residence in the year that it is paid. In the early years of a loan, most of your monthly payment is interest, so this can really add up. If you are in a 28% federal tax bracket, this can have the effect of lowering your borrowing costs by almost a third, depending on which state you live in. This is truly nothing more than a subsidy to home owners, and it's a very popular deduction. In addition, you can always deduct interest on an additional $100,000 of mortgage debt, which can be used for any purpose. This is called the "Home Equity Loan" exception, and it allows you to tap into your home equity for any purpose.

3. Sale - If you have owned and lived in your primary residence for at least two of the past five years, you can earn up to $500,000 on the sale of that house and pay no federal income tax at all. That's assuming you are married - singles get up to $250,000 tax free. And here comes the best part… you can do this as often as every two years for the rest of your life. The one stipulation is that you MUST own and occupy the house as your primary residence. Many of these benefits came into being with the 1997 tax law, but a lot of people are just finding out about them now.

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