How to Be a Financially Savvy Homeowner

Many property-related actions trigger a tax or tax benefit.
By: Tara-Nicholle Nelson

Related To:

Buying a home at a good price and with a good mortgage is only the first step of being a smart homeowner. Smart homeownership is actually a lifelong exercise, requiring that you keep the implications on and for your home in mind as you make major life decisions of any sort. Smart owners also keep in mind the tax implications or advantages involved in the major decisions and actions they take vis-a-vis their homes.

Buying a home. Buying a home triggers some major tax benefits. First, a large chunk of the transaction closing costs are tax deductible. Second, during the time you own the home, up to 100 percent of the interest you pay on your mortgage is tax deductible. This often drastically reduces a new owner’s net income tax liability compared to the taxes they owed as a renter.

Selling a home. Selling a home sparks the potential for capital gains taxation. Also, selling your home in a short sale -- when the purchase price is less than the amount owed on the property, and the lender involved forgives some portion of the debt owed -- usually triggers an income tax on the amount of mortgage debt forgiven.

Estate planning and family transfers. Normally, homes are reassessed for property tax purposes every time ownership is transferred. However, estate planning transfers -- like transfers to a living trust and transfers between parents and children, grandparents and grandchildren, and even between spouses -- are generally exempt from reassessment. This means that if your grandma gives you her home, you may end up keeping her 1973-based property tax rate!

Remodeling. Most folks do not consider remodeling a taxable event, but in some ways, it is -- in others, it isn’t. When you obtain permits to remodel your home, many cities will increase the assessed value of your home to account for the improvements you have made. On the other hand, the money you spend to improve your home is added to your basis in the property for capital gains, allowing you to reduce the potentially taxable amount by the amount you have invested in improving your home.

Refinancing. As they are in a home purchase, the points paid on a home refinance mortgage are also tax deductible.

Becoming a landlord. Whether you are converting your home into a rental property or buying a place with the intention to use it as income property, there are several tax considerations to take into account when you lease a property out.

  • Increased income taxes. The rental income you receive will, in most cases, constitute additional taxable income.
  • Capital gains. The $250,000/$500,000 capital gains tax exclusion is applicable only to your residence. Your rental property may have no applicable capital gains tax exclusion, which means that when you sell it, you may incur a tax on every dollar of net appreciation unless you conduct a 1031 exchange, rolling your net gains into the purchase of a similar property.
  • Local business taxes. Some municipalities consider a rental property to be a going business concern and tax the rental income as they would take a business’ receipts. Investigate whether and how your city views income properties and incorporate any local business taxes into your investment analyses before you buy.

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.

Next Up

5 Types of Neighbors and How to Handle Them

You may love your house, but getting stuck with bad neighbors may have you thinking about putting up a for-sale sign. Here are some tips on dealing with rude, sloppy or nosy neighbors, and even those mean ones with spite houses.

How to Refinish Hardwood Floors

It takes some elbow grease to refinish hardwood floors, but it's worth it. Hardwood floors add value to your home and provide a classic look that goes with any style.

Homeowner Tax Tip: How to Take More Money Home

The tax advantages of homeownership can help you bring home more money every month and afford a larger mortgage (read: better house) than you may think.

Are You Financially Ready to Buy an Investment Property?

Here's what you need to consider in this real estate market before shelling out for an investment property.

Immediate Expenses for New Homeowners to Expect

You know you've got a mortgage. But make sure to budget these costs in as well.

Get Web Savvy to Sell Your Home

Almost 80 percent of home searches start on the internet, so why not finish them there too? In lieu of the traditional method of selling through a real estate agent, some home sellers are turning to the Web to sell their homes.

How to Recover From Bankruptcy

Here's what you can expect in the first two years after bankruptcy.

How to Make Homeownership Affordable

Worried about how to make the mortgage payments? These ideas can help.

How Foreclosure Affects Your Future

Consequences of missed mortgage payments, short sales and foreclosure that all homeowners need to understand.

How to Avoid Mortgage Default

Take these steps to deal early and openly with loan troubles.

Go Shopping

Get product recommendations from HGTV editors, plus can’t-miss sales and deals.


Follow Us Everywhere

Join the party! Don't miss HGTV in your favorite social media feeds.