What You Thought You Knew About The Tax Benefits of Owning A Home

When you add in financing costs, home ownership can certainly take a bite out of your budget. You may believe that the tax benefits of owning your own home will counter the costs you will incur, and to a certain extent your costs will be reimbursed, however you might be surprised at just what you can expect in terms of tax credits and/or deductions.

Mortgage Interest

As a homeowner, if you financed part or all of your home purchase, the interest you paid out at the time you bought the property and throughout the life of the loan can be deducted from your income, reducing your tax liability. You are eligible to claim an itemized deduction for interest that you paid up to $1 million worth of mortgage debt which was used to purchase or make improvements upon your home. You can deduct interest paid on a home equity loan of up to $100,000. Any points you (or the seller) applied towards your home loan can also be deducted.

All of this deducting sounds good, right? Yes, but there’s a catch - unless your exemptions exceed the standard deduction, it’s pointless to itemize. If you itemized before buying your home, then chances are good that your exemptions will certainly exceed the standard deduction which is set at $11,900 for joint filers, $5,950 for singles and $8,700 for heads of households as of 2011.

Are You Really Saving?

Consider a simple calculation to determine if your home is giving you as much of a tax break as you thought:

Married couples: Joint standard deduction = $11,900
Mortgage interest - $12,000
Property Taxes - $2,500
State income taxes - $2,000
Charitable donations - $500
Total deductions = $17,000

Total deductions minus the standard deduction of $11,900 means you lowered your taxable income by only $5,100 more than the standard deduction.

Certainly, owning a home does have tax advantages, however as you can see, in the above scenario buying a home only added $5,100 to what you would normally have been able to write off.

If you are buying a home only as a tax write-off, then perhaps you really need to consider the true financial picture of owning a home. Depending upon your particular situation, the finance costs may outstrip any tax benefits you may acquire over the life of the loan. Bottom line, it’s important to consider the tax advantages of home ownership from every possible angle to ensure that it is the right move for you.

Anita Cooper has been writing about real-estate topics since 2010. Her articles have appeared in the trade magazine "Real Estate Wealth," as well as on various websites. Cooper owns and operates a small writing business providing website and copy-writing material to real-estate professionals.