Can someone explain the long-term tax benefits of owning a home in simple terms?

Asked by Ryth from Trulia, San Francisco, CA Mon Jul 23, 2007

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Kevin Boer, , Palo Alto, CA
Mon Jul 23, 2007
Let me give it a try...

My understanding is the following:

In terms of cash flow, two big-ticket items are tax-deductible:
1) The interest on your mortgage payment(s)
2) The property tax

In terms of long term capital gains, as long as you hold a property for 2 years, you get a capital gains tax exemption on the first $250K of gains if you're single and $500K if you're married.

If you buy $1M worth shares of Google and sell them for $1.5M in two years, you'll pay 15% federal (plus 9.3% CA state, I believe) tax on the entire $500K profit.

If you buy a home for $1M and sell it for $1.5M in two years, and you're single, you'll only get capital gains tax on $250K of the profit. If you're married, you won't pay any capital gains.

Caveat: I'm not a tax attorney or a CPA. Consult with one or both of those specialists for the specifics.
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1 vote
J Lo, Home Buyer, California Glory, Brentwood, CA
Mon Jul 23, 2007
In a nutshell: If you own your own home: Short Term: Most if not all of your interest payments per year are deductible on your income taxes at the end of the year.

Long term: You build equity - if you are single and you sell your home, have lived in it for 2 out of 5 years and you have $250k in "equity" from that property at sale - you do not have to pay capital gains taxes. If you are married you both have the $250k exemption. The capital gains tax has been a point of contention in past decades - and is subject to change if the politician decide to change it. However, it wouldn't be a popular move by any politician.

One last note: Owning your home gives you an asset for future purchases. Your net worth is in your home and this can mean the difference between getting a loan for whatever you may be needing cash for. This is what has gotten the american consumer in some trouble - but if you are smart and only draw on equity for a definitive purpose - you will always come out on top.

Just don't over burden your asset with frivolous things like consolidating credit card debt. Pay those debts from available cash flow during the month.

Hope this was helpful!
2 votes
Kathleen Kel…, , Nashville, TN
Mon Jul 23, 2007
You can also deduct any points you pay, and the IRS will allow you to deduct your loan origination fee if it is expressed in terms of "points"; just make sure it is listed on the HUD-1 as points. Also, if you can get the seller to pay points for you, they are tax deductible for you, not the seller.

The only other thing I would add is that if you plan to use part of your home for business, you can deduct certain expenses (a portion of your utilities, etc.) from your yearly taxes and you can also take a deduction for depreciation on that portion of your house. The only draw back is that when you sell, you will be subject to a recapture tax - on the depreciation portion only.

You should consult with a CPA and/or tax attorney before making any decisions.
1 vote
Melissa Manc…, Agent, Plainville, MA
Mon Jul 23, 2007
Hi Ryth,

I think this team of professionals has covered almost everything. One thing I didn’t see mentioned was PMI (Primary Mortgage Insurance, which is applicable to mortgages that do not have 20% of equity) I think Congress approved this deduction as part of the Tax Relief and Healthcare Act of 2006, but you should always double check with your accountant.

Melissa Mancini, Realtor, CBR, GRI
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1 vote
Paul Slaybau…, Agent, Scottsdale, AZ
Mon Jul 23, 2007
I think everything has been pretty much covered on a personal home, but don't forget the tax benefits of investment property. There are several points worth mentioning, but if you want it kept simple, I'll stick with the ability to defer capital gains. If you sell an investment property after holding it for at least 2 years, the capital gain can be deferred through use of a 1031 exchange. You have to apply the gain towards the purchase of a like property of equal or greater value within specified time periods (which I won't bore you with). The benefit is that the tax can be deferred indefinitely, numerous times, enabling you to have greater purchasing power as you climb the Real Estate investment ladder.
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1 vote
Herman Chang, Agent, Palm Beach Gardens, FL
Mon Jul 23, 2007
The benefits would be:

1. Tax deduction of interest payments (Itemized Deduction)
2. Tax deduction on real estate taxes paid (Itemized Deduction)
3. If you take equity loan for improvements then the interest is tax deductible
4. Tax exempt income on sale of primary home (double for Married, both have caps)
1 vote
J Lo, Home Buyer, California Glory, Brentwood, CA
Mon Jul 23, 2007
Oops, I missed the property tax - depending on where you live that could be a significant number!
Again, good luck to you!
1 vote
Anjanette K…, , Burlingame, CA
Fri Jan 11, 2008
Hi Ryth (great name),

I just uploaded a spreadsheet that outlines the annual tax benefits. It makes it easy to understand (I think!). Visit:

I'd be happy to forward you a copy via email that you can manipulate to fit your actual figures.

Alain Pinel Realtors - Burlingame
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