5 homeownership tax myths
Owning a home tops the dream list for most Americans, and for plenty of good reasons. It's a shelter for your family, a gathering place for your friends and a good long-term investment.
Tax breaks are also frequently cited as motivation for moving from renting to owning, and there are many ways a home can cut your tax bill.
But, as is often the case with the U.S. tax code, homeownership tax benefits are not always clear-cut. That frequently leads to some bad information floating around. Watch "Odds of being audited"
While myths, half-truths and misconceptions may abound, we've narrowed it down to five that, if you buy into them, could cost you.
|Half-truths, misconceptions and just plain hogwash|
1. My mortgage interest will reduce my tax bill.
This is true for the majority of homeowners, but not for all. And this tax break won't work forever.
To take tax advantage of your home loan's interest, you must itemize and come up with a total that exceeds your standard amount. On 2007 tax returns, the standard deductions are $5,350 for single taxpayers, $7,850 for head of household filers and $10,700 for married couples who file jointly. These amounts increase a bit each year to account for inflation.
"Given home prices these days, most owners are itemizing," says Mark Luscombe, principal tax analyst with CCH Inc. of Riverwoods, Ill. By the time they count mortgage interest, property taxes and other nonhome deductions, such as state taxes and charitable gifts, their itemized totals easily surpass their allowable standard deductions.
But most is not all.
Taxpayers who buy a home late in the year, for instance, might find the standard deduction is more beneficial, at least initially, says Kathy Tollaksen, a CPA at Sikich LLP in Aurora, Ill. In these cases, where you make only a few payments in a tax year, depending on your loan you might not pay much interest, at least not enough to exceed standard amounts.
Timing also could reduce or eliminate other home-related tax breaks.
"Quite a few states have real estate taxes that are calculated in arrears. That is, they have already been paid or mostly paid (by the seller) by the time you buy," says Tollaksen. "In the first year, you're seeing taxes that are someone else's responsibility so you're not getting the full tax value of your real estate taxes."
The benefit of mortgage interest also could be a myth if you've lived in your home for a long time. In this case, you likely are paying more toward your loan's principal instead of interest. So homeowners at the end of a loan term don't get much, if any, from this tax break.
|-- Updated: Jan. 24, 2008