What are the tax benefits of owning a home?

When discussing the financial benefits of owning a Spring Texas home, the majority of people understand the concept of building equity. And why building equity in a home is a smarter financial decision than paying rent. Possibly the building equity concept is understood because the majority of people have prior experience building equity in their cars. In addition to building equity and price appreciation, the other financial benefit of homeownership are the tax benefits.

The tax benefits of owning a home are probalby the most misunderstood. And it is easy to understand why. Because some of our tax laws read like some of the toughest word problems from our dreaded college algebra classes. So I am going to do my best to explain in plain english the tax benefits of owning a home, which are:

tax deductions for owning a home1. Interest paid on your home’s mortgage is deductible.

2. Real estate taxes which in Spring Texas include the school tax, county tax, and MUD tax are deductible

3. Mortgage Insurance Premium is deductible.

Now this is the part that may make your head spin. Mortgage interest and real estate taxes are deductible but sometimes they do not provide you with an additional dollar for dollar deduction beyond the standard deduction. And the mortgage insurance premium deduction may be eliminated based on the amount of your Adjusted Gross Income (AGI).

The purchase of a home is usually the trigger point for taxpayers to go from taking the standard deduction to itemizing deductions. Because until a taxpayer has paid interest on a home mortgage and paid real estate taxes does his itemize deductions become greater than the standard deduction.

The standard deduction for 2012 is $11,900 for married couples filing a joint return, $5,950 for singles and married individuals filing separate returns, and $8,700 for heads of households.

As an example, let’s compare the standard deduction for 2012 for a married couple to what the married couple’s who own a home in Spring Texas would be if they itemized.  Our couple for this example purchased their home in 2011 and have owned it the entire year of 2012, they claim 2 exemptions, and their Adjusted Gross Income is $95,000.

Schedule A – Itemized Deductions Form 1040

Lines 1 -4 : Medical and dental expenses –       $0             (couple did not meet the requirements)

Line 5:  a) – State and local income taxes  –       $0            (Texas does not have a state income tax)

Line 5:  b) – General sales taxes –                      $1,025

Line 6: Real Estate Taxes –                                $3,805     (Home is tax assessed at $156,000)

Lines 7-8: Personal property taxes and other  – $0

Line 9:  Sum of lines 5 through 8 =                   $4,830

Line 10 and 11: Home mortgage interest –       $5,960      ($149,000 home mortgage at 4.0% interest rate)

Line 12: Points –                                                $0

Line 13: Mortgage insurance premiums –         $996

Line 14: Investment interest –                           $0

Line 15: Sum of lines 10 through 14 =             $6,956

Lines 16 – 19: Gifts to charity –                        $250

Line 20: Casualty and theft –                            $0

Line 21-27: Job expenses –                              $0

Line 28:  Other misc. deductions –                   $0

Line 29:  Total itemized deductions –              $12,036

Compared to the standard deduction of $11,900, by owning a home the married couple increased their deductions by $136. Although the charity and general sales tax deductions are not directly related to owning a home, the married couple were unable to take advantage of the deductions in prior years because their itemized deductions were not greater than the standard deduction.

The deduction for home mortgage interest and real estate taxes are reported on Schedule A (Form 1040). Additional information about the deductions are available in the IRS publication 936.

If when you purchased your home you did not have a 20% down payment, you are probably paying Mortgage Insurance Premiums which is bad and good. Bad that you are having to pay for mortgage insurance on your home but good if you purchased your home between the tax years of 2007 and 2011 the mortgage insurance premiums may be deductible.  I say may because if your Adjusted Gross Income for 2011 is more than $100,000 (more than $50,000 if married filing separately) the deduction is limited. If your AGI for 2011 is more than $109,000 (more than $54,500 if married filing separately) the deduction is eliminated and not available to you.

But if If you do not exceed the Adjusted Gross Income limits, then you can report the deduction on Schedule A (Form 1040) line 13. Additional information about the deduction is available in the IRS publication 936.

There are additional tax benefits you can receive for owning a Spring Texas home such as a deduction for points paid but since this is a one time tax benefit and not yearly I chose not to discuss them in this article.

I am not even going to attempt to discuss the impact the Alternative Minimum Tax (AMT) has on home ownership tax deductions. The impact of AMT needs to be left to the tax accountants and not an accountant / Realtor like myself.