Mistake to Avoid: Not Understanding Home Ownership Tax Implications

Not Understanding Home Ownership Tax Implications
Photo: Wesley Tingey

Owning a home can provide financial and income tax benefits as well as emotional satisfaction. While a home is usually viewed as shelter and a place to live, for decades, many homeowners saw the value of their homes rise significantly. These homeowners reaped the gains when they sold their homes. Since most homeowners use mortgages to finance a portion of the cost of the home, the gains were leveraged even more. But remember that home values do not always rise.

Income Tax Benefits

The income tax laws provide special breaks for homeowners. These breaks are in the form of tax deductions for mortgage interest and property taxes and preferential treatment of gains when the home is sold. As always, you may want to consult with your tax advisor to get a complete understanding of how the tax laws may apply to your situation.

Benefits from Deductions

Many taxpayers find that the interest on their mortgage and the annual property taxes they pay are large enough to enable them to itemize their deductions instead of using what is commonly referred to as the “standard deduction.”

The “standard deduction” for single filers on their 2018 tax returns is $6,500 and $13,000 for joint filers (up from $6,350 and $12,700 respectively for 2017). For many homeowners, their interest and property taxes exceed those amounts.

Be sure to keep track of when you pay your property taxes. Some areas have due dates close to the end of the year and you must have paid the tax before December 31, to get the deduction.

Another way some homeowners are able to get additional deductions is through the use of home equity loans. Since the interest paid on a home equity loan qualifies as a deduction, you may want to consider a home equity loan as a source of funds to pay off credit card debt, where the interest is not deductible. In addition, the interest rate will probably be lower.

Benefits on the Sale of Your Home

For many years, the tax laws only allowed you to avoid paying capital gains taxes when selling your home if you rolled over the proceeds into a home that was more expensive. There were also some rules that allowed individuals over the age of 55 to avoid some taxes.

In 1997, those rules were changed. Now the law generally allows a married couple filing a joint tax return to exclude up to $500,000 of gains on the sale of their home. For single return filers the limit is $250,000. You must have lived in the home as your principal residence for at least two of the five years before the sale. You can claim this benefit every two years. There are some special rules if you do not meet that requirement for job changes or health reasons. Consult with us for more details.


The tax benefits of home ownership can be significant. Be sure to keep good records about the purchase price and any improvements you make to the home. Pay attention to when you make property tax and mortgage payments to ensure they fall into the year you want to take them as itemized deductions.

Finally, if you have special circumstances (including a potential large gain if selling your home), be sure to contact us to help you get the maximum benefits you are allowed under the tax laws.



© 2017 Thomson Reuters.

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