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For many people, a home is not only a shelter for their family, but also the only real tax shelter available.
The opportunity to reduce your income taxes by deducting your mortgage interest payments, the points you may have paid when taking out your loan, and your real estate taxes is one of the most important reasons for owning a home.
In order to claim these tax breaks, you'll need to itemize your deductions. It's important to note that if you're itemizing in order to claim home mortgage and real estate taxes, you'll also be able to claim any itemized deductions for state and local income taxes, charitable contributions, casualty losses, employee business expenses and other miscellaneous deductions that exceed 2 percent of your adjusted gross income (AGI), and medical expenses that exceed 7.5 percent of your AGI. These deductions can save you many tax dollars - and most people who don't own a home can't take advantage of them.
In this section of the Guide we'll outline the major rules you need to know in order to maximize your home-related tax deductions. We'll also discuss how to handle the purchase or sale of your principal residence. Generally the first $250,000 in gains on the sale of your home will be tax-free (and the first $500,000 will be tax-free, if you are married filing jointly), provided that you meet certain requirements. Losses on sales of your personal residence are generally not deductible, unless you used part of the property for business purposes or rented it out.
Finally, for those of you who own investment real estate, we'll discuss the rules related to reporting rental income and deductions, and handling the purchase or sale of rental property, including second homes.
For more information, see any of the following:
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