By owning a home, Americans can save on taxes.

One main reason for Americans owning their homes is because of the ultimate tax shelter it creates.  Americans can save on taxes when they buy their home, own their home and sell their home.

Mortgage interest deductions and deductions for property taxes are a way to encourage home ownership.

Mortgage Tax Credit – The Mortgage Credit Certificate (MCC) program allows some first time home buyers to benefit from a mortgage interest tax credit.  An MCC, which you first must obtain from your local housing department before you get a mortgage, gives a qualified first-time home buyer a federal income tax credit of up to 20 percent each year the buyer keeps the same loan and lives in the same house.  You can see the tax credit’s benefit immediately in your paycheck by adjusting your W-4 exemption status to reflect the credit.  In some cases, lenders will qualify you for a loan based on the monthly mortgage payment minus the tax credit, enabling you to qualify for a bigger loan.

Mortgage Interest Deduction – With Mortgage Interest Deduction, all but the very wealthy homeowners deduct all the mortgage interest they pay and consider that the primary tax benefit to home ownership.  IRS Publication 936 “Home Mortgage Interest Deduction” says, in general, joint tax filers can deduct all the interest on a maximum of $1 million in mortgage debts secured by a first and second home, plus the interest paid on a maximum $100,000 in home equity loans.  The maximums are halved for married tax payers filing separately.

Property Taxes – Property taxes are also deductible from your income.  Be careful not to deduct escrow money held for property taxes, but not actually used to pay them, say until the next tax period.  Local tax refunds reduce your deduction by a like amount.
TaxesPoints – Home buyers also get to fully deduct all points associated with a home purchase mortgage.  Sometimes called “origination fees,” “loan discounts” and “broker discounts,” each point is one percent of the financed amount.  In many cases, the buyer can also deduct points on the buyer’s mortgage that are paid by the seller.  Points on refinanced mortgages are also deductible, but over time.

Selling Your Home – Even when you sell your home, it continues to be a tax shelter, for a few homeowners.  Your gain is your home’s selling price, minus deductible closing costs, minus your basis.  Thanks to the 1997 Taxpayer Relief Act, many home sellers no longer suffer a taxable gain.  That’s because, under the act, sellers get to keep, tax free, up to $250,000 in capital gains ($500,000 for married sellers who file taxes jointly) on sales of homes used as a principal residence for two of the prior five years.

 

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