Tax benefits abound for homeowners

Over the years, a home has proven to be a sound long-term investment for Americans, and with low interest rates and a buoyant economic outlook, the advantages of purchasing a home today are more abundant and diverse than ever. One of the major benefits of homeownership becomes evident every April, when homeowners realize significant rewards as they calculate federal, state and local taxes.

There are a number of tax breaks available to homeowners, which can result in substantial savings for you and your family. The benefits homeowners reap are evident whether you are recent homebuyer or have lived in the same house for years. [Note: As tax codes can be complicated and sometimes change, check with your tax adviser for any exceptions or restrictions to the benefits outlined below.] Following are the answers to some common questions about homeownership.

•I just bought a home. What are the immediate benefits?

Congratulations on your purchase! You will begin to gain significant financial benefits as soon as you purchase your home, especially when it comes to calculating your taxes. If you itemize deductions on your tax return, the IRS usually lets you deduct the interest portion of the monthly payment you make to your lender. The interest you have paid on a second mortgage or home equity loan may also be deductible. At the end of the year, your lender will provide you with documentation verifying the total amount of interest you have paid on your home loan, which you then may claim as an itemized deduction on your tax form.

Real estate property taxes also can be claimed as an itemized deduction. Additionally, if there are any points — or discount points — on the loan at the time of your purchase, these fees are deductible as well. However, since points are prepaid interest, you cannot deduct the full amount of points in the year paid; generally you must deduct them over the life of the loan.

On the state and local levels, many governments encourage homeownership by offering a variety of incentives and tax benefits that apply to homeowners in their jurisdictions. Consult an accountant, tax expert, or your state and local tax offices for more details.

•I’ve owned my home for a few years now, and I’m thinking of making some upgrades. Are there any tax benefits for me?

Over time, as you make mortgage payments, you are gaining equity in the property and its growing value. Tax laws allow homeowners to tap into this equity to borrow money for any purpose. These home equity loans can be used for improvements to the home or for debt consolidation — and you generally can deduct interest charged on a loan used to improve your principal residence in the year the interest is paid.

•I’m ready to sell my home and move to a larger (or smaller) residence. What are the tax implications?

If you are married and have owned and occupied your principal residence for at least two of the past five years, you and your family can earn up to $500,000 on the sale of that property and pay no federal income tax whatsoever. (Single homeowners are eligible for up to $250,000.) This federal exclusion also is recognized in most states, so your profits are completely tax-free.

While owning a home may make a significant difference in the amount of money you owe the federal government each April, deductions are only the tip of the iceberg when it comes to the advantages of homeownership. Other benefits, such as the increased equity from appreciation in the value of your home, can provide a nest egg for future lifestyle changes, such as retirement.