More Tax Breaks
As noted in a previous blog the mortgage interest deduction is the most notable and beneficial of the homeownership tax breaks, but there are even more beneficial deductions.
Points are considered “prepaid interest” by the IRS. Thus, if the homeowner paid ‘points’ as part of the mortgage loan, the IRS allows these to be deducted on their taxes.
There are several caveats to deductibility, some being: If your acquisition debt exceeds $1 million or your home equity debt exceeds $100,000, you cannot deduct all the interest on your mortgage and you cannot deduct all your points. Points are deductible only in the year that they are paid, and they must be part of the loan to purchase or build the home. Also points are only deductible if they are an established business practice in the area and they are within the range that is generally charged in the area. Homeowners can also fully deduct (in the year paid) points paid on a loan to improve the main home.
Several other qualifiers do apply, and all must be met in order to get a full deduction. Please see a qualified tax professional for all details and tax help.
A homeowner who pays points on a refinanced loan or an equity loan or line of credit may also be eligible for this tax break, but in most cases the points must be deducted over the life of the loan.
Selling a Home
Another huge tax benefit is in the sale of a home. Prior to 1997 the only way a homeowner could avoid paying taxes on the proceeds on the sale of a home was to purchase another house. In that year the law changed allowing homeowners to exclude from taxation the gains made on the sale of a home of up to $500,000 for a married couple, or $250,000 if single or married and filing separately. The homeowner must own the property for at least two years, and they must have lived in the property for at least two of the five years prior to the sale. There are certain exemptions to this rule so see a tax professional for the details, as well as for several other homeowner tax benefits.