One of the biggest advantage of home ownership versus renting is that there are a lot of financial benefits including numerous tax breaks available to the homeowners that are not available to renters.
Most renters can only claim the standard deduction since they may not have enough expenses to itemize. When you become a homeowner, chances are that your expenses will exceed the standard deduction just with home mortgage interest expense alone.
Now, this will allow you to file Schedule A - itemized deduction and deduct additional expenses such as the charitable contribution, gambling losses, medical expenses, miscellaneous expenses, casualty and theft losses, state or local income tax, property tax, etc.
In addition, when you sell your home and you own it and it has been your principal residence for 2 out of the 5 years from the date you sold the house, you may be able to exclude as much as $250,000 ($500,000 for qualified married joint filers) of the gain on the sale of your home. See the article Tax Breaks for Homeowners Selling Their Home for additional information.
What Can You Deduct and Claim
Home Mortgage Interest
Home Mortgage Interest – includes interest paid on the first mortgage, second mortgage, and home equity loans. You can deduct the mortgage interest for the interest paid on an acquisition debt amount up to $1,000,000 ($500,000 if married filing separately). For home equity loans, you may be able deduct the interest paid on the debt amount up to $100,000.
Points are certain charges paid in order to reduce the interest rate on a mortgage. It may also be referred to as loan discounts, loan origination fees, maximum loan charges or discount points. In general, points are considered pre-paid interest so you cannot deduct them all at once on your tax return. However, you may be able to deduct the full amount of the points paid in the year that you buy or build your main home.
Qualified Private Mortgage Insurance
The amount paid for mortgage insurance premiums is treated as home mortgage interest and is deductible in your tax return. The insurance must be in connection with your home purchase debt and the insurance contract must have been issued after 2006. Qualified mortgage insurance is mortgage insurance provided by the FHA (Federal Housing Administration), VA Loans or Veterans Administration loans, the Rural Housing Service and the private mortgage insurance (as defined in section 2 of the Homeowners Protection Act of 1998 that takes effect on December 2006.)
Real Estate Property Tax
You may be able to deduct real estate property tax levied for the general public welfare. You can deduct these taxes only if they are based on the assessed value of the real property and charged uniformly against all property under the jurisdiction of the taxing authority.
Residential Energy Efficient Tax Credit
With regards to the residential energy efficient tax credit, you can claim a credit of 30% of the costs paid or incurred in for any qualified energy efficiency improvements and any residential energy property but the credit is limited to only $1,500. Examples of these are exterior doors and windows, insulation material or system that are primarily designed to reduce heat loss or gain at home and any roof that are made up of metal or asphalt with appropriate pigmented coatings specifically and primarily designed to reduce heat gain of the home. Other examples are residential energy property such as heat pump water heaters, central air conditioner, natural gas heaters or furnaces, propane gas heaters or furnaces, water boilers, and stoves that used biomass fuel,
You may be able to claim as much as $2,000 per year in Mortgage Credit if you obtain a mortgage interest credit certificate from your local or state agency when you first purchase your principal residence.
Home Buyer’s Tax Credit
The first-time home buyer’s credit is available for taxpayers who bought their main home in the United States after 2008 and before May 1, 2010 (or October 1, 2010, if you entered into a written binding contract before May 1, 2010). Qualified first-time home buyers credit can claim as much as $8,000 in credit and qualified long-time resident can claim as much as $6,500 in credit. The credit is refundable, meaning that you can still take the credit even if you do not owe any taxes.
Expenses You Cannot deduct
- Home owner’s association fees - are not considered as real estate property tax. In addition, these are not paid to the local government.
- Property Insurance- real estate property insurance, hazard insurance, umbrella insurance, etc.
- Maintenance and repairs such as repainting the inside or outside of your home, fixing leaky faucets, broken windows, etc are not deductible. However, these maintenance expenses may be deductible if you are renting your home to others.
- Utilities – any utilities paid such as electricity, water, trash collection, gas, etc are not deductible.
- Home improvements – this is not deductible in the year incurred but it will be added on the adjusted basis of your home. In essence, it is deductible but it will be deferred until you sell your home.