Building Mortgage Interest: More Tax Deductions and Incentives for Homeowners

Learn about the many tax advantages of homeownership, including special deductions and local incentives.

By: Tara-Nicholle Nelson

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The primary tax advantage of owning a home is the mortgage interest deduction, which can add thousands of dollars to your purchasing power, every year! As good as it sounds, the mortgage interest deduction is just one of several tax perks of owning a home. Here are some of the other tax deductions and advantages that are available only to homeowners:

Property Taxes

As a homeowner, your property taxes go to your local government. They help fund schools, parks, emergency services and other state and municipal functions. For many homeowners, property taxes are a serious expense, rivaling mortgage payments in some areas. The IRS offsets the expense of your state/local property taxes, though, by allowing you to deduct your property (aka real estate) taxes from your itemized federal return. Of course, non-homeowners do not have to pay property taxes, so this deduction is not a tax advantage to homeowners per se, but it does eliminate the ouch of what is easily the second largest ongoing cost of owning a home.

Closing Costs

Speaking of financial “ouches” related to owning a home, closing costs pose a significant cost to most homebuyers, running anywhere from 2 percent to 6 percent of the purchase price of the home. Fortunately, some closing costs are tax deductible. In particular, loan origination and discount 'points' are 100 percent deductible on the tax return you file for the year in which you purchase your home. In some cases, mortgage points are also deductible when you refinance your home mortgage.

This deduction enables some potentially major money-saving strategies. Paying discount points, each equal to 1 percent of the dollar amount being financed, reduces the interest rate -- and the resulting monthly payment -- for the life of the loan. Buyers who are flush with cash and in dire need of tax write-offs have been known to “pay points” and even go so far as to time their purchase transactions near the end of the year so as to be able to recoup the money paid out as points in immediate tax savings.

Consult with your tax professional and your mortgage professional before you close escrow on either your purchase or refinance to get the most bang out of your closing cost bucks.

Home Improvement

Homeowners should track and keep receipts for every dollar and cent spent on home improvements and repairs -- for the entire time they own their home. Generally speaking, homeowners are taxed on every dollar of appreciation their home gains over $250,000 for singles and $500,000 for married couples. The baseline from which the $250,000/$500,000 exemption and, accordingly, the taxable appreciation are measured is the purchase price of the home plus the cost of all home improvements and repairs. The IRS not only encourages renters to buy, but also encourages homeowners to maintain and improve their homes!

Local Incentives

Not wanting to be left out, many state and local governments also offer tax incentives to buyers and owners who take various actions the municipality wants to promote. For example, some states and towns offer incentives for buyers who purchase vacant, foreclosed properties or properties in specific redevelopment districts. Many municipalities offer property tax savings for homeowners who improve their homes by disaster-proofing them; in earthquake country, completing seismic retrofits can get you a tax savings, while some hurricane-prone areas might offer tax perks to owners who simply return and rebuild their homes. Also, increasing numbers of cities are offering tax advantages for homeowners who install energy-conserving or other green features, like solar panels, tankless water heaters and dual paned windows in their homes.

Check with your city’s economic development or building permit office to see what local tax considerations you might be able to incorporate into your short- and long-term home improvement plans.

NOTE: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.