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Tax Benefits of Buying, Owning and Selling a Home

Jan. 16, 2020
Managing Your Mortgage, Mortgages
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Uncle Sam wants you to own your home: You get tax breaks to reduce the costs of buying it, owning it, fixing it up and selling it. Here’s a description of deductions, credits and other tax incentives that encourage homeownership.

First, a word about deductions

A tax deduction cuts your taxes by reducing your taxable income. Several deductions are available when you buy or own a home, but you can take advantage of them only if you itemize. Roughly 1 in 7 filers are expected to itemize deductions on their 2019 returns, according to the Tax Foundation.

» MORE: Itemized deductions: What they are and how they slash taxes

Mortgage interest deduction value

The mortgage interest tax deduction is designed to make homeownership more affordable by reducing your tax bill. You may deduct interest on mortgage debt on your primary home and a second home. There’s a limit on the amount of home-acquisition debt for which the interest is deductible, and this limit varies, depending on when you bought the home.

If you bought the home on or after Dec. 15, 2017, you may deduct interest on debt up to $750,000 (or $375,000 if married filing separately). If you bought it before Dec. 15, 2017, you may deduct interest on debt up to $1 million ($500,000 if married filing separately).

If you were under contract to buy a home before Dec. 15, 2017, and closed by Jan. 1, 2018, you may deduct interest on debt up to $1 million.

When you refinance a mortgage, the tax law treats the new loan as if it were originated on the old loan’s date.

Use NerdWallet’s mortgage interest deduction calculator to find out what this means for your next mortgage.

Property tax deduction capped at $10,000

The IRS lets you ease the pain of paying property and other state and local taxes. You may reduce your taxable income by up to $10,000 in deductible property taxes, state and local income taxes, and sales taxes that you pay ($5,000 if married filing separately).

How you spend home equity funds matters

Interest paid on home equity debt can be deducted only if the money is used “to buy, build or substantially improve the taxpayer’s home that secures the loan,” according to the IRS. So the interest is deductible if the equity debt is used to, say, put an addition on a home. But it’s not deductible if the debt is used to pay off credit card debts or to buy a vacation home.

» MORE: How much is my house worth?

Sellers can avoid capital gains

When you sell a house, the capital gain is the difference between the price you paid for it and the price you sold it for. This capital gain is treated as taxable income. If you owned the house long enough, you’re allowed to exclude up to $500,000 of this capital gain as income so you don’t have to pay federal income tax on it. (The exclusion is capped at $250,000 for married taxpayers filing separately.)

Other tax breaks may be available

Mortgage points

You may be able to deduct the points you paid on your mortgage if you can deduct all the interest on the mortgage (in other words, if the mortgage doesn’t exceed the limit on home-acquisition debt).

You may deduct the points in full the year you pay them as long as your main home secures the loan, it was a purchase loan (not a refinance) and you satisfy eight other requirements that ensure that the points are valid. Otherwise, you may deduct the points equally each year over the life of the loan.

However, if you use the proceeds of a refinance to pay for improvements to your main home, “you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds. You can deduct the rest of the points over the life of the loan,” according to the IRS.

» MORE: Mortgage discount points: What you need to know

Home office expenses

You may deduct expenses for your home office if you’re self-employed and you use part of your home exclusively and regularly as your principal place of business or to meet clients and customers.

» MORE: Self-employment tax deductions

Moving expenses

Only active-duty members of the armed forces are allowed to deduct moving expenses. The move must be because of a permanent change of station, due to a military order.

Renewable energy tax credits

You can claim a tax credit on the costs of buying and installing items that generate electricity using the sun, wind or fuel cells. The credit is also available for solar water heaters and geothermal heat pumps.

Medically necessary home improvements

When calculating deductible medical expenses, you may include the cost of home improvements or the installation of medical equipment in your home. You may also include costs of improvements to accommodate a disability, such as widening doorways and building entrance and exit ramps.

To take these deductions, the equipment or improvements must benefit you, your spouse, or dependents who live with you.

» MORE: How to claim medical expenses on your taxes

Mortgage credit certificate

Some state housing finance agencies offer mortgage credit certificates through their home buyer programs. The certificates bestow a credit on your federal tax bill of up to $2,000 a year. This is a credit, not a deduction — you can use the credit to cut your taxes, even if you use the standard deduction and don’t itemize.

Tax breaks of homeownership
Mortgage interestFor homes bought before Dec. 15, 2017, you may deduct the interest you pay on mortgage debt up to $1 million ($500,000 if married filing separately). For homes bought Dec. 15, 2017, or later, you may deduct the interest you pay on mortgage debt up to $750,000 ($375,000 if married filing separately).
Mortgage interest deduction for second homesDeduct the interest you pay on mortgage debt up to $750,000 ($375,000 if married filing separately) on your primary home and a second home.
Property taxesYou may deduct up to $10,000 ($5,000 if married filing separately) for a combination of property taxes and either state and local income taxes or sales taxes.
Home equity debtThe deduction for interest on home equity debt applies only when it's used to buy, build or substantially improve the home, according to the IRS.
Moving expensesOnly active duty members of the armed forces may deduct moving expenses.
Capital gains exclusionYou must have owned the home, and used it as your primary residence, during at least two of the five years before the date of sale. You cannot have used this exclusion in the two years before the sale of the home.

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