Tax Advantages of Homeownership – Popular Tax Incentives

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Have you recently bought a home?  Do you know that you have now entered a world of tax advantages exclusive to only homeowners?  The feeling is great that Uncle Sam rewards those that choose to purchase their homestead and of course as your Realtor, I want to make sure you know all there is to know about what you stand to gain from this exclusive status of homeowner.

Though the best person to offer advice and consultation would be a CPA or a certified tax consultant, the information below will help you to plan and be prepared for what lies ahead during tax season.

Purchase of a New Home

If you have purchased a new home in 2011 – then this year when you file your taxes you can deduct three things; any mortgage points that were paid as part of the purchase, prepaid mortgage interest and pro-rated property taxes.

There are a few conditions on the mortgage point deduction, like the fact that the points must be for the primary residence of the homeowners.  Also, the amount of money spent by the homeowner toward the purchase of the home at closing needs to be greater than the amount that is charged in points.  Since lenders sometimes inflate the loan amount to accommodate the points, it is important to be aware before filing taxes since in that scenario the points amount would not be tax deductible.

Depending on what day you close on your home, you will most likely be charged pre-paid interest on your loan and that amount will be deductible. For example, a home that closes on the tenth day of the month will have twenty days of prepaid interest, all deductible when you file your taxes the following year.

In the same way, the amount of property taxes that make up for the time you will be taking possession of the home might have been covered in the previous property tax payment made by the seller.  If that happened the amount owed by you would have been charged as part of your closing costs – a deductible amount.

Refinancing An Existing Home

Mortgage debt is broken down into two types; home acquisition debt and home equity debt.  As the name suggests, home acquisition debt is the amount you paid to purchase your home.  During a refinance, however, your new loan amount that is utilized to pay off your previous mortgage is considered home acquisition debt with anything above and beyond that amount being qualified as home equity debt.  Interest accrued in both types of mortgage debt is tax deductible, however home equity debt has a tax deduction ceiling of $100,000.

Yearly Tax Breaks for Homeowners

Each year, until you are paying interest on your home mortgage, you will be eligible for a tax deduction on up to $1,000,000 of mortgage debt.  This can be debt you have taken on for the purpose of acquiring a new primary residence, to build or renovate an existing property as well as a second home you may have.

Home Equity Debt Interest Tax Advantage

If you use the debt acquired through your home equity to improve upon your primary residence (no limit) or for any other reason (limit of $100,000) it is possible that the interest on that loan could be tax deductible.  This is an ideal scenario for homeowners with some equity to borrow against that equity and pay off high-interest credit cards or vehicle loans – debt that carries interest that cannot be deducted.

Tax Exclusions on Forgiven Debt or Alternatives to Foreclosure

If you are able to secure a mortgage workout for your primary residence or if you are a homeowner who has received debt forgiveness, you may qualify for federal income tax exclusion on that forgiveness.

Energy Conversation Tax Incentives

With a growing emphasis on green living and energy conservation, there are a number of tax incentives offered to homeowners in exchange for demonstrated energy saving measures taken in the home.
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In terms of buying and selling homes, there is always the opportunity to donate items from your home to charitable organizations – all tax deductible of course.  There are myriad tax advantages of homeownership and after additional research, chances are you may find more nuances that could suit your own situation and maybe even provide a greater benefit than the ones listed here.