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Tax Benefits Of Home Ownership





An often-cited benefit of homeownership is the tax deductions that come with it. The 2 most common tax deductions are:

  1. The ability to deduct mortgage interest you pay (subject to some limitations).

  2. The ability to deduct property taxes you pay (subject to some limitations).

However, A & B will only be allowed to take these deductions if they itemize their deductions. The Tax Foundation predicts that only about 10% of taxpayers will itemize, so the odds of A & B itemizing are very low. But let’s run the numbers anyways, just to double check if they will be able to itemize or not.

A & B are married, so they must choose a filing status of either “Married Filing Jointly” or “Married Filing Separately.” Like 95% of all married couples in the US, A & B choose to file their taxes as married filing jointly, and thus are eligible for a Federal standard deduction of $24,400. This means their total Federal itemized deductions must exceed $24,400, or else they will not be able to deduct their mortgage interest or their property taxes.

In year one of owning their home, A & B will pay $7,676 in mortgage interest, and $2,709 in property taxes. Together, these add up to $10,385 of potential itemized deductions from homeownership. This is less than half the $24,400 they need to itemize. A & B would need to have $14,015 in other itemized deductions such as medical expenses, charitable contributions, or state income taxes (subject to the overall limit of $10,000 for all state and local income/real estate taxes) in order to itemize, which is unlikely.

Standard Deduction (MFJ) vs. Itemized Deductions From Homeownership


While it is true that homeownership can come with extra annual Federal tax deductions (mortgage interest and property taxes), the average homebuyer will not benefit from these potential deductions.

However, that doesn’t mean there are no tax benefits to homeownership at all. Even though the average American homeowner will not receive any annual Federal tax benefits, you still may be eligible to exclude any capital gain you realize upon selling your home from counting as Federal taxable income, up to $500,000. There are strict rules to qualify for this, but this can be a huge tax break on what may otherwise be a relatively substantial capital gain.

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