In addition to being the single largest investment for most people, purchasing a home can yield tax benefits. Special tax incentives can reduce the cost of owning a home; in addition, these benefits will also leave the homeowner with more money when they decide to sell their home.

Tax Benefit #1: Mortgage interest

One of the best tax incentives of home ownership is that the interest that is paid on the mortgage, up to one million dollars, is tax deductible. This tax break is on any type of home, even a second home, as long as the homeowner spends a certain amount of time at the home.  Also, a homeowner can deduct the interest of other types of debt that uses a home as security, such as a home equity loan.  However, the amount that is deductible may be limited if the amount of loan is above the actual value of the home.

As a third mortgage interest tax incentive, a homeowner can deduct the amount of money that is paid for points paid on new or refinanced home loans. Paying points often is a way to reduce the interest rate of the mortgage on your home. Now, this rule changes if you have a home equity loan or if a loan is secured by a second home. During these two instances, the homeowner is allowed to deduct the points over the life of the loan rather than in the year of purchase.  However, if the homeowner refinanced the mortgage in order to make home improvements, a portion of the points can be deducted that same year.

Tax Benefit #2: Tax-Free Profits

A terrific advantage to home ownership is that homeowners do not have to pay taxes when they make a profit from selling their home.  This law allows a homeowner to exclude a profit of up to $250,000 in profit from the sale of the homeowner’s principal home.  For a married couple that files their taxes jointly, up to $500,000 can be excluded from taxes. This tax advantage can also be used for the sale of land that is adjacent to your home, as long as the land is not used for business purposes.

There are two stipulations to this tax benefit. The home that you sell must be your primary residence, and you must have lived at the home for a total of two years out of the five previous years. This exemption can only be claimed once every two years. Now, if a homeowner does not meet these specific requirements, then a partial exemption can be made. This is true if the sale was made due to heath reasons, a change in employment, or because of unforeseen circumstances.

Tax Benefit #3: Property taxes

Homeowners are allowed to claim real estate property taxes as a deduction on their Federal income taxes. This applies to the principal of the home and any other homes that the homeowner might own. Money that is placed in escrow to pay future taxes cannot be claimed as a deduction until the escrow is closed and the taxes are paid.  While renting a home may be an affordable option, there are many long-term benefits associated with homeownership.