In addition to helping you build wealth, owning a home provides valuable tax breaks. Knowing about potential tax savings associated with homeownership is the best way to get the most out of this major investment — taking tax advantage of your home.

Positively in debt

You’re likely already aware that homeowners can deduct their mortgage interest payments — up to $1 million in what the IRS terms “acquisition indebtedness.” But did you know that you also may be able to write off interest on an additional $100,000 in home equity indebtedness? You don’t even have to use this debt to improve your home; you could use it to pay off debt whose interest isn’t deductible, such as credit card balances and auto loans.

In the past, the IRS has challenged some equity indebtedness claims where debt was used to acquire a home. But more recent U.S. Tax Court decisions have bolstered confidence that most taxpayers should be able to deduct interest on the full $1.1 million amount. (Note that there are exceptions. Review your situation with your tax advisor.)

Certain home upgrades also offer tax savings. Homeowners may claim a 10% credit for qualifying energy-efficient improvements — both purchase and installation costs — up to a lifetime limit of $500. Windows may account for up to $200 of this amount.

Time to sell

When you sell your principal residence you may exclude up to $250,000 ($500,000 for married couples) in capital gains. However, you must have:

• Owned the home for at least two years,
• Used it as a principal residence for two of the five years preceding the sale, and
• Not have claimed the exclusion within the last two years.

If an unexpected life change (including death and job loss) forces you to sell your home in less than two years, a pro-rata exclusion amount based on the length of your residence may be available.

Further, in what might be considered a “bonus” tax break, any capital gains eligible for the $250,000 home sale gain exclusion are also excluded from the 3.8% net investment income tax that now applies to certain higher-income taxpayers.

Maximum tax savings

Depending on your circumstances, there may be additional tax benefits associated with homeownership.  McClanathan, Burg & Associates, LLC can help ensure you’re receiving all of the savings you’re entitled to.

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