Tax Benefits of Homeownership

In addition to the benefits of owning vs. renting that we outlined above, there are financial benefits beyond the accumulation of equity that make homeownership a positive step toward your future financial health and stability. Most of these benefits have to do with taxes, which are structured by the federal government in a way that incentivizes people to own their own homes. Filing taxes as a homeowner, you’ll find, can substantially reduce your tax burden and make the overall cost of ownership even lower than the housing costs you paid as a renter.

The Tax Benefits of Homeownership One of the primary ways in which homeowners can save money on taxes is through the Mortgage Interest Deduction.

One of the primary ways in which homeowners can save money on taxes is through the Mortgage Interest Deduction. For the majority of taxpayers, the portion of their monthly mortgage devoted to interest is, under the current tax code, taken as a direct deduction to their annual income, directly lowering their tax liability. For example, if a homeowner’s pre-tax income was $35,000 and they paid $5,000 in interest throughout the year toward their mortgage, their taxable income would be reduced to only $30,000, saving them roughly $1200 in taxes (depending upon their tax bracket). This benefit is particularly beneficial for first-time homeowners who tend to put less money down on their homes; because the first five to ten years of their mortgage payments tend to be applied primarily to interest, their mortgage interest deduction tends to larger, saving them more money come tax time.

Another key tax benefit of homeownership is the capital gains exclusion. Typically, when individuals and businesses hold an asset (such as property) and then sell that asset for more than what they bought it for (a profit), they have to pay taxes on the profit that they realized from the sale. But not so with a primary residence. In that case, taxpayers are allowed to exclude up to the first $250,000 of capital gains on the sale of a primary residence ($500,000 for married couples filing jointly). This is great news for most homeowners, who will likely realize their single largest lifetime capital gain when they sell their home. The exclusion means taxes savings amounting to tens of thousands of dollars.

In addition to these two large deductions, there are other miscellaneous costs associated with purchasing and financing a home that can reduce your tax bill in April. For buyers who put down less than 20 percent on their new home—typical of many first-time homebuyers—their mandated Private Mortgage Insurance expense (which covers the interests of lenders should the borrower default on their loan) is currently also deductible. And any state real estate taxes paid on your new property are also deductible from your federal taxes, further reducing what you have to pay annually to Uncle Sam!