Tax Benefits of Homeownership

One of the primary tax benefits for the homeowner is the advantage of deducting mortgage interest from their tax liabilities. The home mortgage interest deduction is allowed for interest paid on a loan secured by the same home. This can be for a primary or second home. A loan to purchase a home is called an acquisition debt and is considered any loan that is used to buy, build or substantially improve the home.

Full deductibility for acquisition debt applies to homes valued at $1,000,000 or less ($500,000 or less if married and filing separately). Also, to qualify for this deduction you must be legally responsible for the loan, meaning that there must be a true debtor-creditor relationship between you and the lender, and the mortgage must be secured by the home in question.

Mortgage interest is also deductible on a home-equity loan if the loan totaled $100,000 or less ($50,000 or less if married and filing separately) and totaled no more than the fair market value of the home reduced by the above limitations.

Interest paid on personal consumer debt is not tax deductible unless that debt has been converted into mortgage debt. This would include interest paid on credit cards, auto loans or installment and consumer loans. 

Consumer debt can be converted into mortgage debt by way of refinancing your existing home loan. When refinancing you may take cash out to pay off the consumer debt, thus the debt is now part of the mortgage loan with the interest now tax deductible. However, this must be done during the tax year for which you are filing.

If you were married and the seller of a home, you can now completely exclude from taxation up to $500,000 ($250,000 if single or married and filing separately) in any capital gains on the sale of that home, but the home must have been occupied at least two years of the previous five year period. With these and other possible deductions homeownership should make that tax burden lighter.

This information is not to be considered personal and specific tax advice, always consult a qualified tax professional.

Kevin Hartmann