A home can be a great investment as the tax code provides for significant tax benefits for owning a home, the most significant of which are as follows:
First-Time Homebuyer Credit - the First-Time Homebuyer's Credit was increased to $8,000 and is generally available for purchases made between January 1, 2009 and May 1, 2010, provided the home is occupied as the buyer's principal residence within 24 months of the purchase. For purchases after November 6, 2009, no credit is allowed if the purchase price exceeds $800,000.
To qualify as a first-time buyer in 2009, you must have not owned a principal residence in the three years before the purchase. You must also occupy the home as your principal residence and it must be located in the United States. The credit only needs to be repaid if the home is sold within 36 months of the purchase date (subject phase-out for higher income levels).
Home Mortgage Interest Deductions - in most cases, you can deduct all of the interest you pay on any loan secured by your home if you itemize your deductions. Interest is deductible on up to $1 million ($500,000 if married filing separately) of home-acquisition loans. These are loans used to buy, build or substantially improve your principal residence or second home, and are secured by that same residence.
Interest on a home-equity loan or line of credit of up to $100,000 ($50,000 if married filing separately) is also deductible. You can also use this deduction for one additional residence that you identify as your second home. As long as the home-equity loan is secured by your home, it doesn't matter how you spend the proceeds as long as the total debt is not higher than the fair market value of the property.
You can also deduct points charged by the lender when you take out the loan. The IRS defines points as any extra charges paid by a home buyer at closing in order to obtain a mortgage. In effect, points are prepaid interest. Points paid to secure a loan for the purchase, construction or improvement of a principal residence are usually fully deductible in the year you paid them. Points paid to refinance your home mortgage must be deducted ratably over the term of the loan.
Real Estate Tax Deduction - after the home-mortgage interest deduction, the next most important tax break for homeowners is the deduction for real estate taxes. You can deduct real estate taxes and state and local property taxes on all your real estate. The only decision you may need to make is whether you prepay the coming year's taxes or delay the current year's taxes to see which way it might benefit you the most.
For the 2009 tax year, taxpayers who use the standard deduction will be entitled to an additional standard deduction for paying certain state and local real estate property taxes that would be deductible if itemizing deductions. Single taxpayers will be entitled to a maximum of $500 and joint taxpayers will be entitled to a maximum of $1,000.
Selling Your Home - when you sell your principal residence, you can exclude from your taxes up to $250,000 in gains ($500,000 if you are married and filing jointly or a surviving spouse if the sale is within two years of the other spouse's death). To qualify, you must have owned and used your home as a principal residence for at least two of the five years preceding the sale. There are limitations if you used the property as a rental or vacation property or as a home office. If you realize a gain on the sale greater than the exclusion, that amount is taxed at capital gains rates. However, any losses on the sale of a principal residence are not deductible. Special exceptions are available if you were required to sell your home due to a change in place of employment, health issues or other unforeseen circumstances before meeting the two-year principal-residence rule.
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