ANSWERS: 1
  • Homeownership has some advantages over renting, one of the most important being preferential treatment in the tax code. The government views broad homeownership as a key to maintaining stable communities and a robust economy, so it has created an array of income tax deductions that make it a little easier to buy and maintain a home. Just about all homeowners can qualify for these deductions.

    Home Mortgage Interest

    Most people can fully deduct the interest paid on a home mortgage. To do so, you must itemize your deductions rather than claim the standard deduction. You should receive a Form 1098 from your lender each year indicating the amount of interest you paid. When deducting mortgage interest for a home you bought during the year for which you are preparing your taxes, remember to include any "points" you paid at closing. Points are prepaid interest, and for many homeowners they are fully deductible in the year they were paid. Mortgage insurance is usually also deductible. You can also claim a mortgage interest deduction on a second home, but you must use that home as your residence for part of the year; a home you rent full time to someone else is not eligible. The total amount of home debt--all loans on first and second homes--eligible for the mortgage interest deduction is limited to $500,000 for a single filer, $1 million for a couple filing jointly.

    Home Improvement Loan Interest

    If you plan to borrow money to finance improvements to your home, a home equity loan has tax advantages over using credit cards or builder-arranged financing. The interest on home equity loans used for improvements is fully deductible. For home equity loans taken out for other purposes--say, debt consolidation or to finance a vacation--you can only deduct interest on the first $100,000 of the loan. Though you may be able to borrow more than your home is worth--on the assumption that the improvements will raise the vale--you can deduct home debt only up to the assessed value.

    Property Taxes

    Property taxes paid for first and second homes are fully deductible if you itemize.

    Home Office

    If you use part of your home for work, you may be able to claim a home office deduction. Generally, you calculate the percentage of your home used for business and then deduct that percentage of your home's utility and maintenance costs. Be warned: The tax rules are very specific. The area claimed as a home office must be used "regularly and exclusively" for business. If you have a clothing repair business, for example, you can't just set up your sewing machine on your dining room table once a week and then claim the dining room as a home office.

    Other Deductions and Credits

    From time to time, Congress will create home-related deductions and tax credits to further policy objectives. In 2009, for example, Congress created tax credits of up to $8,000 for first-time home buyers and $6,500 for repeat buyers in an attempt to stimulate the depressed housing market. Other deductions and credits have been created for such things as installing energy-efficient windows and providing housing to Hurricane Katrina victims. Since these items phase in and out and usually have very specific rules, consult a tax adviser to see what's available and whether you qualify.

    Source:

    IRS: Mortgage Interest Deduction (PDF)

    Bankrate.com: Home Equity Loan Deductions

    IRS: Home Office Tax Deductions

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