Buying a home can be a stressful task to undertake. From the research it takes to find out which house you want to taking the time to calculate how much you can realistically afford, it is refreshing to know that buying a house can lead to some pretty favorable tax breaks. Some of the most common tax breaks are as follows:

Deductible Mortgage Interest and Taxes

For most homeowners, the biggest tax break they will receive comes from the mortgage interest and taxes they pay in a given year. Both of these amounts are deductible as itemized deductions on Schedule A. Taxpayers can deduct mortgage interest on up to $1.1 million of debt on the purchase of a home and/or improvements to the home. For taxpayers who have two homes, 100% of the mortgage interest paid on the second home is deductible, as well. However, the $1.1 million limit applies to total debt on the two homes and improvements to those homes. Real estate property taxes paid are also deductible, even if they are paid through an escrow account. It is important to note that payments to an escrow account are not deductible. The amounts paid from the escrow account to the taxing authority are deductible.

Gain Exclusion

In some cases, you are able to exclude all of the gains from the sale of your home. This can be another major tax benefit of owning a home. If you owned and lived in the home for at least two years out of a five year period, the first $250,000 in gain is excludable from taxable income ($500,000 for married filing jointly). Any excess gain over the threshold is taxed as a capital gain on Schedule D.

If you do not qualify for the two-out-of-five-year test, you may still be able to get a partial exclusion. If the sale of your home is because of a change in employment, a change of health, or some other unforeseen event, then you may qualify. An example of a partial exclusion would be if you lived in the home for one out of five years, you would get to exclude $125,000 ($250,000 for married filing jointly).

Home Equity Loans

When you have enough equity in your home, you may want to get a home equity loan to pay for a vacation, improvements to your home, or a new swimming pool for the family. You can deduct interest on up to $100,000 of home-equity debt as mortgage interest, regardless of what you spent the money on.

Improvements to Your Home

Although home improvement costs don’t qualify as a deduction, you should still track the amount you pay for items such as windows, paint, fences, or even landscaping. These costs will be added to the price you paid for your house when determining the amount of gain you have if you decide to sell your home. Although it might not seem like much, these costs add up and can save taxpayers significant tax.

When considering all of the costs that go along with homeownership, it is good to know that there is some relief when it comes to your taxes. Contact a tax professional at Abacus CPA’s, LLC to help ensure your tax benefits are maximized when purchasing a new home. We can be reached by phone at 417-823-7171 or by email at Better Guidance. Smarter Decisions.


Cody Sapp, CPA