What are some of the tax advantages of owning a home?

Tax breaks enter the home ownership picture from all angles: buying, owning and selling. Remember, tax laws are constantly changing and complex, and you should consult with your professional tax advisor before filing any claims on your tax returns. Here are the basics as of this writing:

Home Buying
Tax-savings begin with deductions allowed for:

• Settlement charges for the use of money, such as "points." (A point is a sum equal to one percent of your loan amount. Points are charged to increase a lender's yield and attract money into the housing market. For example, one point on an $86,000 loan is $860; two points total $1,720.)
• Prepaid interest on prorated loan payments made between settlement and your first mortgage payment.
• City, town and/or county real estate taxes on the purchased property.

Home Ownership
Your home provides shelter for both you and your taxes. For example:

• The interest paid on your loan is deductible, as are your property taxes. This interest deduction is also a major tax advantage in owning a second home for yourself.
• You may deduct a portion of your home expenses if you have a qualifying home office.
• Many health-related additions to your home required by your doctor (such as air conditioning for an asthma sufferer) are deductible, provided the addition does not add the the value of your home.
• Casualty losses (such as flooding, hurricane damage, etc.) that are not reimbursed by insurance are deductibel, subject to income limits.

Home Selling
When you sell your home tax-savings help defray many of the expenses of selling, such as:

• "Fix-up" expenses incurred in repairing your home for sale may be deducted, as long as the repairs have been make within 90 days of the sales contract date, are paid for within 30 days of closing, and are not capital improvements (such as a new roof).
• If, when you sell, you have to pay a penalty for prepaying your mortgage, that charge can be deducted. Fortunately, few mortgages have prepayment penalties today.
• Under certain conditions, you may deduct moving expenses within limits.
• If, within two years of selling, you buy a new home of equal or greater value, you can defer payment of any tax of the sale of your old home.
• When that deferred tax comes due, you can subtract the cost of home improvements from your net sale price ("netsale price" is your sale price minus closing costs, broker's and lawyer's fees). You can also subtract title insurance fees, recording fees, transfer taxes and other acquisition costs. This reduces your gain, and also your taxes.
• If you're 55 or older and have lived in your home for 3 of the past 5 years, you do not have to pay taxes on gains up to $125,000.

If you pass up the one-time $125,000 gain exclusion and if you do not reinvest in a new home when you sell, you can spread out your profit by permitting the buyer to spread purchase payments over a period of years, thereby reducing your taxes in any one year.

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