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What are my tax advantages in buying (or selling) a home?

Significantly, most likely. But before we get specific, you should realize that tax laws—federal and local—are not written in stone. They change often, and though we make every effort to keep this site current, we aren’t monitoring each jurisdiction daily. So accept this information as a guideline and be prepared to verify it before completing any tax forms. 

Facts for Buyers

1. MORTGAGE INTEREST The interest you pay on your home mortgage is usually 100% deductible from your income, thereby lowering your tax liability substantially. This one important tax advantage is what makes home ownership viable for many individuals and families.

2. SECOND HOMES If you're buying a vacation home, it, too, can save you money on your taxes. You simply have to use the home for yourself or your own family 14 days a year. If you also rent the property out more than 140 days a year, you must stay in it yourself at least 10% of the total rented days. (Example: Rent it out for 200 days in the year and you must stay there yourself for 20 days at least.) Just as with your primary residence, all mortgage interest and real estate taxes are deductible on qualifying vacation homes. And if you rent the property out for part of the year, other expenses such as depreciation may be deductible, too. Consult the appropriate tax literature for particulars.

3. DEDUCTIBLE POINTS When you buy your home you'll be charged a number of settlement points by the lender. There's nothing mysterious about points; one point equals 1% of the loan. They can be paid by buyer or seller, or split between both. Some buyers are surprised by this "added expense", but you can actually make points work for you. Since all points are fully deductible by the buyer no matter who pays them, you may negotiate to have the seller pay a large portion of the points. You still get to claim them in full as a tax deduction during the year you buy.

4. STATE AND LOCAL TAXES The IRS doesn't expect you to pay taxes on the money you've already paid in state and local real estate property taxes. So you can deduct these tax payments on your federal form. States and localities have different rules regarding the deductibility of their property taxes. Consult the appropriate tax literature for guidance.

5. BORROWING FROM AN IRA Recent tax law changes make it possible of first time home buyers to make a penalty free withdrawal from an Individual Retirement Account to secure a down payment. What's more, the money can come from your, your parents', even your grandparents' IRA.

6. MOVING EXPENSES Under certain circumstances you can deduct the cost of moving to your new home. Suppose you're moving to accommodate a new job or a job transfer. If your new job is more than 50 miles further than the distance between your old job and your old home, then you can deduct the cost of moving your family's possessions and the cost of staying in a motel or hotel while en route to the new home. For example, if the distance between your old home and old job was 10 miles, to qualify for this deduction the distance between your new job and the old home must be at least 60 miles.

Facts for Sellers

1. CAPITAL GAINS The federal government has become considerably more generous about letting home sellers keep the proceeds from the sale of their home. Today, joint filers can enjoy $500,000 profit from the sale of their homes tax free. Those filing singly can take $250,000 profit without paying capital gains taxes (Note that some states still tax all gains on home sales.)

2. THE TWO YEAR RULE To qualify for tax exempt gains, the owner of the home must have used it as a primary residence for any two of the previous five years. These tax benefits can be realized every two years, so if you enjoy buying fixer-uppers and then moving on, chances are all or most of your profits will be sheltered.

There used to be a “once in a lifetime” exemption on gains from home sales for those over age 55 who might be downsizing to a new home. This exemption has been eliminated, mostly because it is now irrelevant. Today, no one need stay in a “too big” house for fear of paying high gains taxes on profits when they sell. Anyone can sell every two years and enjoy the $250,000/$500,000 exemption from capital gains taxes.