There are significant tax advantages for buying, owning and selling a home. Remember, the tax laws are complex and constantly changing, so 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 on your closing statement. Your tax preparer will ask you for your closing statement so you can take the allowable deductions from closing. Some examples:
• Settlement or closing 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 a $100,000 loan is $1,000.00. Even points paid by the seller are, in many instances, a tax deduction for the buyer!
• Prepaid interest on prorated loan payments made between closing and your first mortgage payment.
• Some other fees associated with your mortgage and other closing costs may be deductible. Check with your tax preparer.

HOME OWNERSHIP

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

The interest paid on your loan is deductible. This interest deduction is also a major tax advantage in owning a second home.
• You may deduct a portion of your home expenses if you have a qualifying home office.
• City and/or county real estate taxes are deductible.
• 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 to the value of your home.
• Casualty losses (such as flooding, hurricane damage, etc.) that are not reimbursed by insurance are deductible, subject to income limits.

HOME SELLING

When you sell your home, you generally realize additional tax benefits, such as:

• Up to $250,000 for singles and those using married, filing separate status, and $500,000 for married couples are excluded from gains realized on selling your residence.
• Your gain is the difference between your net cost and the net selling price, meaning you can deduct real estate commissions, closing costs and any major improvement you made while you owned the home from your gain. This reduces your gain and also your taxes.
• Any tax on the gain in excess of $250,000 ($500,000 for filing a joint return) is computed as capital gain rather than ordinary income. Long term capital gain is taxed at a maximum of 15% versus a maximum income tax of 35%.
• You can reduce your immediate tax burden, in situations where the gain is larger than the exclusion amounts, by making an installment sale where you spread out your income and taxes over a period of years.