Homeownership has many benefits — and some of the primary financial benefits come at tax time! Here are some key points you need to know about homeownership and taxes:
Deductibility of property taxes
As a homeowner, you are required to pay an annual property tax on your home (if you are a renter, you’re already paying your landlord’s property taxes; it’s just included in your monthly rental payment). This annual tax can provide a nice deduction on your tax return!
The amount of property tax you pay is based on the area in which you live (how much money the local government requires) and the value of your home. In Kentucky, the local tax assessor determines the value of your home via periodic appraisals. If you believe that the assessor’s value is incorrect, you can challenge it, sometimes by simply calling or visiting the assessor
Deductibility of mortgage interest payments and “points”
Income tax benefits of homeownership also include the ability to deduct mortgage interest payments on your tax return. Plus, if you paid “mortgage points” when you purchased the home in order to reduce your interest rate, those costs may be deductible as well.
Exclusion for Capital Gains taxes
Almost every item you own, including your car and television, is a capital asset. But your home is one of the few capital assets that actually might increase in value over time — which is great in that it helps build equity. As a general rule, when you sell a capital asset that has increased in value, you need to pay what are called capital gains taxes.
When it comes to selling a home, however, most homeowners qualify for an exclusion of up to $250,000 of the gain. If you’re filing jointly, this exclusion rises to $500,000. This means that if your home rises in value, you can — up to a substantial point — reap benefits without being penalized at tax time.
Please note that these insights are not intended to provide specific tax or legal advice – be sure to see your CPA for the best advice concerning your own, unique situation.