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Mention taxes, and most people will probably cringe. Mention tax benefits, however, and you will probably get a better response. This is another great advantage to homeownership. Along with being an equity investment, homeownership can help you save money by offering tax breaks via certain itemized deductions from your income tax.

Notable Note: Another reason to consider buying
If you are renting a home, you cannot deduct the taxes paid on the property that you are living in. Even if your landlord raised your rent to cover the cost of taxes, it doesn't matter. The tax deduction is only for the property owner who is actually paying the tax.

Where Deductions are taken

In order to take advantage of homeowner deductions, you must file Form 1040 and itemize your deductions on Schedule A . However, if you itemize your deductions, you cannot take the standard deduction. You may want to determine which deduction is more beneficial to take. If the standard deduction exceeds the homeowner deductions, you may want to claim that one instead. You should consult your tax advisor for the best way for you to file.

What Expenses May be Deductible for Homeowners

  • Interest paid on a home loan. Interest that is paid on a first mortgage, second mortgage, home improvement loan, or a home equity loan is tax deductible (assuming that you are itemizing deductions and not claiming the standard deduction). However, there are some limitations to this. First, the deductions are limited to a maximum of two mortgaged residences. This may be a primary residence and one other property, such as a vacation home. Rental and business properties are not considered in this limit of two. The next limitation is the amount of the debt. Your mortgage interest cannot be deducted if your aggregate mortgage balance is more than $1 million, or $500,000 if married and filing separately. For home equity loans, you can deduct interest for loans up to a total of $100,000 (or $50,000, if married and filing separately) for your main home and second home, and your Loan-to-value ratio cannot exceed 100%. Your lender should provide you with the annual form 1098 (the year-end interest statement).
  • Real Estate (or property) Taxes. Property taxes are what most homeowners in the US pay for the privilege of owning a piece of real estate. They are assessed annually by county or local authorities to help pay for public services. Property taxes on all real estate, assessed by state and local governments as well as school districts are fully deductible from income taxes.  

Note: This Tax Guide is provided for informational purposes only, and does not constitute legal or tax advice. Consult your tax advisor regarding your particular situation.

Source: JP Morgan Chase & Co. (September 2006)

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