Owning a home can bring tax benefits along with a place to call your own. In general, homeowners may deduct mortgage interest and property taxes within limits, and primary residences have capital gains exclusions when they are sold. These benefits can make a real difference over time, but they depend on your individual situation, and the rules have limits and exceptions. This overview explains the basics in plain language so you know what questions to bring to your tax professional. As always, consult a tax professional for your situation.
Mortgage Interest Deduction
For many homeowners, mortgage interest is the largest potential deduction connected to owning a home. If you itemize deductions on your federal return, you may be able to deduct interest paid on a mortgage used to buy, build or substantially improve your main home, and in some cases a second home.
Key points to understand
- It applies only if you itemize. Many taxpayers take the standard deduction instead, because it is larger than their itemized deductions. If you do not itemize, you will not benefit from the mortgage interest deduction.
- There are limits. Federal law caps the amount of mortgage debt on which interest can be deducted. The limits depend on when the loan was taken out and other factors.
- Home equity loans have rules. Interest on home equity loans or lines of credit may be deductible only if the money is used to buy, build or substantially improve the home that secures the loan, and only within the overall limits.
- Your lender reports interest. Each year, your lender typically provides a form showing the mortgage interest you paid.
Property Tax Deduction
Property taxes paid on your home may also be deductible if you itemize. However, federal law limits the total amount of state and local taxes, including property taxes and state income or sales taxes, that you can deduct. Those limits have been the subject of recent federal legislation, so ask your tax professional what applies to the current tax year.
Property taxes in mountain counties
Property taxes are set locally, so they vary by county and sometimes by location within a county. Georgia offers homestead exemptions for primary residences, which can reduce the taxable value of your home. If you buy a home you will live in full-time, ask the county tax assessor’s office about available exemptions and the deadline to apply. Second homes and rental properties generally do not qualify for homestead exemptions on a primary residence.
Capital Gains Exclusion on a Primary Residence
When you sell your primary residence for more than you paid for it, you may have a capital gain. Federal tax law allows many homeowners to exclude a significant portion of that gain from income. In general, single filers may exclude up to $250,000 of gain and married couples filing jointly up to $500,000, if they meet ownership and use requirements.
General requirements
- You must generally have owned and lived in the home as your main residence for at least two of the five years before the sale.
- There are limits on how often you can use the exclusion.
- Partial exclusions may be available in some circumstances, such as certain job changes or health reasons.
- Second homes and rental properties generally do not qualify for the full exclusion unless specific conditions are met.
Keep good records of what you paid for the home and the cost of capital improvements, such as additions, new roofs or major system upgrades. Those costs may increase your cost basis and reduce any taxable gain.
Second Homes and Rental Cabins
Many buyers in the mountains purchase second homes or rental cabins. Tax rules for these properties differ from those for a primary residence:
- Mortgage interest on a qualified second home may be deductible within the overall limits.
- If you rent the property, rental income generally must be reported, and certain expenses may be deductible.
- How much you personally use the property versus how much you rent it can affect how income and expenses are treated.
- Selling a rental or second home can have different tax consequences than selling a primary residence.
These rules can be complex, which is another reason to work with a qualified tax professional before you buy.
Other Costs to Keep Track Of
Some costs related to buying or owning a home may have tax implications, while others do not. Keep records of:
- Your closing statement, which shows costs paid at purchase.
- Annual mortgage interest statements.
- Property tax bills and payments.
- Receipts for capital improvements.
- Records related to any home office or rental use.
Organized records make tax time easier and help you and your tax professional identify any benefits you may be eligible for.
Common Misunderstandings
- “Every homeowner gets a big deduction.” Not necessarily. Many homeowners take the standard deduction and do not itemize.
- “All of my closing costs are deductible.” Only certain costs may be deductible, and others may be added to your cost basis instead.
- “Any home sale gain is tax-free.” The exclusion has limits and requirements.
- “Rules never change.” Tax laws change, sometimes significantly. Always check current rules.
Next Steps
This article is general information, not tax advice. Tax situations differ, and rules change over time.
- Keep your closing statement and homeownership records in a safe place.
- Ask the county tax assessor about homestead exemptions if the home will be your primary residence.
- Talk with a tax professional before buying a second home or rental property.
- Reach out to Sherry if you would like referrals to local professionals as you plan your purchase.
Consult a tax professional for your situation. Understanding the basics now can help you plan and make the most of your investment in a home.
