As a homeowner, you may deduct interest on debt you incur to
build, acquire or substantially improve your principal residence. There is a
limit on this deduction; but it rarely applies in this part of the country. You
can fully deduct the interest on the first million dollars of home acquisition
Another, underutilized benefit of home ownership involves the
home equity loan interest deduction. As a homeowner, you may deduct interest on
any loan that is secured by your residence, subject to two limits.
deduction is limited to interest on the amount of debt that does not exceed the
equity in your home. For this purpose, "equity" means the difference
between the fair market value of your home, less the amount of any other debts
that are secured by your home.
Note that you may deduct interest on all kinds of debts, even
car loans, so long as the lender secures the loan by recording a mortgage
against your residence. You may think it risky business to secure loans with
the equity in your home. For some people, it is. But for others who routinely
make payments timely, the possibility of loss is pretty remote.
The second limit on home equity loan interest deductions
restricts deductions to interest on not more than $100,000 of home equity
loans. So, to the extent your home has equity, it is entirely feasible that you
might convert the family’s auto loans to fully deductible "home
Note that the tax laws do not require that your home equity
loan be used for the purchase or improvement of your home. On the contrary, you
can use the loan proceeds for whatever purpose you choose.
Homeowners may also deduct real estate taxes on their home.
These interest and tax deductions can make the cost of home ownership much less
expensive. Consider this illustration: Assume that you are in the 28% income
tax bracket. If you pay $1000 per month in interest and real estate taxes on your
home, you will save $280 per month in federal income taxes.
That means your net
payment is only $720, which may be much easier to handle than a $1,000 payment.
The point is that you must take the tax savings into account when you compute
the monthly home mortgage payment you can afford.
The law also allows you to exclude up to $500,000 of gain on
the sale of your home if you are married, file a joint tax return, and the home
was your principal residence for at least 2 of the 5 years preceding the sale.
If you are unmarried or do not file a joint tax return, the maximum gain you
can exclude is $250,000.
This exclusion is not a "once-in-a-lifetime"
exclusion. It may be used again and again so long as you have not claimed the
exclusion within two years preceding the sale date. There is no longer a
requirement that you "buy up" to defer the tax on any home sale gain.
In conclusion, your home offers the benefit of current
tax-relief through interest and real estate tax deductions. If offers
additional tax relief if you sell it at a profit as your gain will be excluded