The Tax Benefits of Homeownership

Buying a home is generally the largest financial purchase of one’s life.  As such, as a prospective homeowner it's important to be aware of the income tax benefits of homeownership.

To help subsidize the cost of homeownership, certain income tax itemized deductions are available to homeowners. Such itemized deductions allowed are for property tax and mortgage interest (on mortgages used to acquire you home on balances no larger than $1.1 million).  In the event you are subject to alternative minimum tax “AMT” the property tax deduction does not provide an income tax benefit but the mortgage interest still does (however realistically to afford a relatively "lower" priced home in Burlingame, for example, one's income would be high enough where the AMT would not apply).

To illustrate, if you were to pay $10,000 per year in property taxes and $30,000 per year in mortgage interest, you'd have total itemized deductions of $40,000.  Assuming a federal and California combined income tax rate of 40%, then the income tax benefit (assuming no AMT) potentially would be $16,000. That means that effectively you'd pay $16,000 less in taxes per year, which is pretty substantial, and one of the primary reasons not only do people buy homes, but also why Americans have among the highest rates of homeownership in the developed world.

In addition, there are some nice tax subsidies if you sell your home for a gain. If during the preceding five year period ending on the date of the sale, and you've used the home as your principal residence for at least two of the last five years, you could potentially exclude up to $250,000 of gain (appreciation) from any capital gains taxes if you're single, or up to $500,000 of gain if you're married and filing a joint tax return. This type of tax benefit doesn't exist for any other type of investment -- if you were to buy stocks and they appreciated say $200,000, you'd have to pay capital gains taxes on that $200,000 gain -- not so if the gain was related to your principal residence.

As always, consult your tax professional.

About the Author
Benjamin Lewis Lesser, CPA is the owner of First Peninsula Accounting, a public accounting practice in San Mateo. Ben provides tax and accounting solutions to bay area business and individual clients with a niche expertise working with healthcare and medical professionals.