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Tax Time Can Mean Big Savings for Homeowners

WASHINGTON, D.C. – March 15, 2011 – (RealEstateRama) — As the April 18 federal income tax filing deadline approaches, many American home owners are realizing the financial benefits of homeownership—savings that can add up to tens of thousands of dollars over several years.”The mortgage interest deduction is one homeownership tax incentive that has been part of the tax code for nearly 100 years,” said Bob Nielsen, chairman of the National Association of Home Builders and a home builder from Reno, Nev. “Incentives such as this have helped millions of American families be able to afford a home of their own.”

A study from NAHB economists, “The Tax Benefits of Homeownership,” details sample savings for a variety of income levels and homeownership situations. In one example, a household with an $80,000 annual income that buys a home with a $200,000 mortgage will save on average $1,765 in the first year—and realize a total benefit of $41,138 over the expected period of homeownership.

The three most important sources of tax savings for home owners are: deductions for mortgage interest; deductions for real estate taxes; and the capital gains exclusion for the sale of a principal residence.

Home owners who itemize their federal income tax deductions can deduct 100 percent of their mortgage interest payments on a first or second home for up to $1 million of mortgage debt, as well as interest paid on up to $100,000 of home equity loans.

State and local real estate taxes paid each year on an owner-occupied home are also deductible.

Mortgage insurance premiums—generally required when a home is purchased with a down payment that is less than 20 percent of the mortgage loan amount—can be deducted from taxable income as well.

When it is time to sell their home, most taxpayers don’t have to pay capital gains tax on the profit from the sale. Under present law, married couples who have owned and occupied their principal residence for at least two of the past five years do not have to pay any taxes on the first $500,000 in profits from the sale of their home. Single filers earn up to $250,000 tax free.

Home owners rely on the mortgage interest deduction each year to help offset the costs of homeownership, but the deduction is in danger as a national deficit commission has proposed reducing or eliminating it as part of a restructuring of the tax code.

The NAHB website provides the study “The Tax Benefits of Homeownership” and additional information about the threat to the mortgage interest deduction.

EDITOR’S NOTE: NAHB is providing this information for general guidance only. This information does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind nor should it be construed as such. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action on this information, you should consult a qualified professional adviser to whom you have provided all of the facts applicable to your particular situation or question. None of the tax information in this release is intended to be used nor can it be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.