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How Home Ownership Reduces Your Tax Burden

Owning a home is an enormous personal step. You get to experience the satisfaction of knowing the house is yours and build equity rather than paying rent.  

In addition to building wealth, home ownership helps reduce your tax burden. Your mortgage interest and real estate taxes are large expenses that almost anyone can deduct from their taxes.

Mortgage interest

You can deduct interest on your primary residence (the one in which you live) and a second residence. The mortgage interest on properties you rent is generally not deductible; however, there are some conditions that allow you to declare a rental property a qualified residence for the purpose of deducting the interest. 

Home equity line of credit interest

If you have a home equity line of credit or a second mortgage on your home, you can also deduct the interest you pay. These loans must be secured by your home.

Home equity debt is limited to the lesser of:

  • The fair market value of the home minus the total acquisition debt on that home, or
  • $100,000 (or $50,000 if your filing status is married filing separately) for main and second homes combined

The interest that you pay on a qualifying home equity loan is generally deductible regardless of how you use the loan proceeds. The primary exception is purchasing tax-exempt investments or bonds.

Limitations on deductions

The IRS limits the deduction to the first $1 million in combined property values. If your mortgage loan exceeds $1 million, some of the interest that you pay on the loan will not be deductible.

You cannot deduct interest from a mortgage on a third property.

IRS Publication 936 has more details about home equity debt.

Real estate taxes

Only the legal property owner can deduct the real estate taxes. And only taxes paid to the taxing authority can be deducted for a specific year. Taxes placed in escrow rarely qualify for deductions.

PMI deductions

You may quality for private mortgage insurance (PMI) deductions if you purchased your home in 2007, 2008, 2009 or 2010. The deduction phases out if your gross income exceeds $100,000.

Home improvements

Home improvements and repairs are generally nondeductible. Ask your CPA about deducting interest if you take out a loan to make substantial improvements and the loan is secured by an additional mortgage on the property.

If you make certain changes to your home that improves your home's energy efficiency, you may be eligible for one or more federal income tax credits.

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