The Tax Benefits of a Mortgage

The U.S. federal government has taken many actions to encourage home ownership, including creating the Department of Housing and Urban Development, the Federal Housing Administration and government-backed loans such as FHA, VA and USDA Rural Development loans. One of the biggest things the government has done is provide homeowners with many tax benefits that help to make home ownership more affordable than renting. There are several ways that home ownership lowers your income tax liability.

Mortgage Interest Deductions

Interest on loans of less than $1 million is tax deductible, whether the loan is for a primary or secondary home. Home equity loan interest on loans under $100,000 is deductible as well, even if you did not use the money for home improvements. Late payment fees and any prepayment penalties also count as deductions. For most homeowners, their itemized deductions, including mortgage interest, amount to more than their standard deduction, so they save money. Mortgage insurance is also deductible under certain circumstances; see IRS Publication 530 for details.

Discount Point Deductions

Any up-front mortgage points paid to buy down the interest rate of a loan are tax deductible, including home equity loans and refinances. If you are planning to stay in your home for a long time, points help you save a lot of money in interest. The fact that points are deductible means that the government is helping you to save money on the interest you pay on your home. The IRS allows you to take points deductions in the tax year the loan is closed, or to spread them out over the life of the loan. You can find specific information in IRS Publication 530.

Closing Cost Deductions

Certain other loan closing costs are deductible as well, including title search fees, title insurance, transfer tax, survey fees, deed recording fees and associated legal fees. You deduct these for the tax year in which you close on the loan.

Real Estate Taxes

Local real estate taxes, also known as property taxes, are deductible, regardless of whether you or the seller paid them. As per the 2009 version of IRS Publication 530, you can deduct $500 of real estate taxes on your federal tax return even if you take the standard deduction. This jumps to $1,000 for couples filing jointly.

Capital Gains Exemption

When a person sells an asset such as stocks or bonds at a profit, the profit is considered a capital gain. Capital gains are taxable as income. The profit made on the sale of a home, however, is not taxable up to the first $250,000 for each taxpayer. That means that a couple filing jointly who own a home together are not taxed on the first $500,000 profit they make from the sale of that home. Since most Americans’ single largest appreciating asset and source of personal wealth is their home, this means that the bulk of the average American’s wealth is non-taxable.

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