Buying a new home is a dream that most of us cherish but we keep postponing the decision to do so as it poses a tremendous financial challenge. However if you look at the various tax benefits attached to investing in a home you would rather feel incentivised than challenged. The attractiveness of tax benefits will push you to seriously weigh your decision of renting a house and giving your landlord monthly sums of money against owning a house by leveraging.


The tax benefits associated with owning a home can be broadly classified as tax deduction and tax credits.

The most basic tax deduction benefit that comes with owning a home being that both the property tax, the mortgage insurance and interest payments you make on the mortgage are deductible from your taxable income. Not just that event the imputed rentals that you may earn from the property you buy are not to be included in your taxable income.

Tax credit is an incentive that allows one to deduct the amount of credit from the taxes owed to the government. There are many different examples of tax credit provided by the government. One well-known tax credit that is available to homeowners is the tax advantage that is provided to encourage people to promote energy efficiency in their homes. By opting for this, homeowners can enjoy tax benefits of up to 30% of the cost of installation. However, there are usually discrepancies from one state to another.

Tax deductibles, on the other hand, reduce your taxable liability by reducing your taxable income. There are various tax deductions available for homeowners on closing costs. However, there are sometimes fixed requirements that you may have to meet in order to avail the tax deductibles. Some of the many tax deductions that are available to homeowners are mentioned below.


1) Tax Benefits When Selling Your Home

There are tax benefits that you can claim at the time of selling the place. These can go as far as to exclude either a part or the whole profit that you obtain when you sell the house. Although there are plenty of criteria that need to be met to avail of these tax deductions too, there is a high possibility that you won’t be paying taxes on the profits you make.

Capital Gains Exclusion – This is considered the most considerable tax benefit that homeowners can enjoy. When you are looking to sell your home, you get a benefit of upto $500,000 if you are married and if you are single, you get a benefit of $ 250,000. This means that all profits up to that point can be kept by the homeowner. Considering that other investments are usually taxed at about 15%, this deduction helps you save about half a million dollars in the process.

Tax Saving on Home Improvements – While repair work may not have any tax benefits, works that are considered as improvements, like replacing countertops or putting in a new heating system, do come with some benefits. These costs can be added to the purchase price of your home when you plan on selling it. After all, home improvements add value to a house so keeping receipts of this kind of work when it is done will help.

2) Tax Benefits When Buying A Home

Although buying a home may be a hard choice, as you need a significant amount of cash input, there are numerous deductions that one can obtain when buying a home. Some of which are:

Mortgage Interest – Most people buy a house by taking a mortgage. The interest you pay on the mortgage is an allowable expense and you may deduct you’re your taxable income. With regard to the quantum of interest income that is deductible there is an upper limit. You are allowed to deduct interest expense on your mortgage until you have cumulatively deducted $1 million in interest costs. The ceiling is $500,000 if you are married and file your tax return separately from your spouse. The amount of deduction you stand to claim is usually higher in the first few years of the mortgage term as your monthly installments then carry a larger commitment towards interest. The interest component within the monthly payment comes down with time.

Discount Points – If you have purchased discount points when applying for a home loan, you will be able to enjoy a lower rate of interest on your home as well as lower monthly payments. This is because a point equals one percent of the loan amount thus getting points could save you more than $500 on your tax bill, in the first year after buying your home. If you plan on staying in the home for a long period of time, then purchasing discount points is a good option however, if you do not plan on living there long then you should opt out as the difference in payment would not be enough to offset the cost savings.

Real Estate Taxes – Depending on where you plan on buying your home, your property taxes will accordingly be steep or normal. However, the best part is that these taxes can be deducted from your yearly taxes. Your accountant will inform you on the amount you can deduct yearly but it can easily go up to $4000 to $5000.

Mortgage Insurance – Although most people choose to mortgage their homes, putting a 20% down payment may not always be possible. So you will need mortgage insurance. The good part is that, if you make less than $100,000 a year, you can deduct this amount from your tax bill. If you make more than that but less than $109999, it may still be possible for you to get a deduction for part of your mortgage insurance payment. This deduction ends up being quite sizeable, averaging around $1000.

Other Tax Benefits

Home Office Deduction – If you intend to use part of your home exclusively for running a business, you are allowed additional deductions on your taxes. The additional deductions may pertain to depreciation, utilities, repairs and insurance. However it is imperative that the space for which deduction is claimed is being principally used for business. It is a useful deduction, but you need to be prudent and honest as the audit rate is very high so you wouldn’t want to avail of it unless you really meet the criteria.

Home Equity Loans – When taking a home equity loan, homeowners are allowed to deduct the interest on the loan. You can take out an equity loan to cover home improvements. The interest from the loan can be used to deduct your taxes to up to $100,000 of mortgage debt.

These deductions and exclusions that are available to homeowners are more useful for those falling in a higher tax brackets. This is because, not only do they have higher marginal tax rates but they will also take most opportunity of itemized deductions on their tax returns.