One of the biggest benefits of owning a home is the number of tax benefits that you can receive. As a homeowner, you can deduct your mortgage interest and property tax payments from your taxable income, even though the increase of home value can be as much as that of a return on investment or stock dividends. Homeowners can also exclude the capital gains they receive from selling their homes. These are especially lucrative for those in a higher tax bracket.
Another one of the tax benefits of buying a home is the ability to deduct mortgage points you paid upfront when closing on your home purchase. One mortgage point also called a discount point, is equal to 1% of your loan amount.
Generally speaking, you’ll deduct points over the life of your loan rather than in the year you paid them. However, there is an exception to this rule if you meet a series of tests, as outlined by the IRS. The tests include:
- Having a mortgage that is secured by your main home.
- Paying for points that didn’t cost more than what is generally charged locally.
- Paying for points that weren’t paid in place of other closing costs, such as appraisal or title fees.
Visit the IRS website for the entire list of tests you’ll need to pass to fully deduct mortgage points in the year you paid them.
One of the tax benefits of owning a home doesn’t kick in until after you sell your home — tax-free profits.
If you sell your house at a profit, your capital gains are tax-free up to $250,000 if you’re single, and up to $500,000 if you’re married filing jointly. You must have lived in and used the home as your primary residence for at least two out of the five years before the sale date to qualify for this tax perk.