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Major Tax Benefits to Owning a Home

I’ve been researching ways to think about buying vs. renting a home.  In the meantime, I’ve found a lot of really cool tax benefits that you could qualify for if you own your own home!  Please don’t forget to consult a tax professional.

Mortgage Interest Tax Deduction

Assuming you’re paying $300/month in interest for your mortgage, you can “save” over $1,200 a year in taxes by deducting your interest payment from your income.  It’s not real savings though, since you’re still paying net interest, but it reduces the real cost of your loan (i.e. a 3% interest rate might actually be considered a ~2% interest rate.)

Property Tax Deduction

This can also add up.  Assuming you’re paying about $3,000 a year in property taxes and are at a 30% tax bracket, you can get $1,000 a year back in tax benefits.

Capital Gains Exception

Here’s the most attractive one.  Your first $250,000 in profit ($500,000 if you’re married filing jointly) when selling your principal home (for 2 of the last 5 years) is tax free.  This is huge — assuming you’re married and can earn $500,000 on your home, which can save you up to $150,000 or more in taxes!

SMALLER / LESS COMMON DEDUCTIONS

Home Improvement Loan Interest Tax Deduction

Similar to the first two, if you take a loan out for a “capital improvement” to your house, you can reduce the real cost of your loan with this deduction.  A capital improvement is treated differently by the IRS than an “ordinary repair.”

Home Office Tax Deduction

Part of your home must be set aside exclusively for conducting business.  But if you qualify, you can adjust your gross income to account for the cost of owning the percentage of the home you use for business.

Home Equity Loan Tax Deduction

Let’s say you borrow some money against your house to use on another home or another investment.  You can reduce the cost of interest on your loan similar to above with this deduction.


Note that the deductions above aren’t actually saving you money, but reducing your cost of owning a home and should be part of a rent vs. buy decision.

But I do want to say more about the Capital Gains Exception / Exclusion — which is a really powerful tool and really, really hard to beat.

For example, a 7% return on the stock market and a 6% return on your principal residence with the Exclusion is not equal — in fact you’re likely better off with a 6% return on your principal residence.

Plus, with smart leverage I think you can reasonably find real estate opportunities with a 10% or more potential return profile as long as you do your own homework and analyze your own deals.

Do you consider tax advantages when thinking of buying or renting a home?

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