The closing document also shows you prepaid another $500 to the lender as escrow for the coming year's taxes due next Jan. 1. The $500 you reimbursed the seller at closing is deductible on this year's tax return, but the $500 held in escrow is not deductible until it is paid the next year.
Home equity loansPersonal interest is no longer deductible unless it's the interest you pay on a home equity loan. However, there is a restriction on the amount of these loans for which the interest is deductible. Generally, the IRS limits the home equity debt for which you can deduct interest to the lesser of $100,000 ($50,000 if married filing separately), or the total of the home's fair market value reduced by the amount of the existing home mortgage debt.
For example, you bought your home five years ago, your mortgage balance is $95,000 and the house's fair value is $110,000. To pay for your daughter's college tuition and buy her a car so she can get to school, you take out a home equity loan of $42,000. In this case, your interest deduction would is be limited to $15,000. This is the lesser of the $100,000 limit or $15,000 -- the amount that your home's fair market value of $110,000 exceeds the existing mortgage debt of $95,000.
The IRS considers the interest on the $27,000 of the loan that is over the home equity debt limit ($42,000 minus $15,000) as nondeductible personal interest. So while you generally can get some tax benefit here, you need to keep in mind what your loan deductibility limits are when you consider a home equity loan.
When you sellWhen you decide to move up to a bigger home, you'll be able to avoid some taxes on the profit you make. Tax law now allows you to exclude up to $250,000 of gain you make on the sale or exchange of property. Married taxpayers filing a joint return can exclude up to $500,000.
You can only take this exclusion every two years. And the IRS requires that you own and live in the house as your principal residence for at least two of the five years prior to its sale.
If you must sell before you meet the IRS ownership and residency requirements, you can still get a partial exclusion on any profit. To qualify for prorated tax relief, your home's sale must be because of a change in your health, employment or unforeseen circumstances.
What's not deductibleWith all the possible tax deductions you can get from your house, there are still a few things for which you have to bear the full cost.
You've probably noticed that a portion of your house payment goes into escrow so your bank can pay your property insurance bill. Unfortunately, that insurance fee is not tax-deductible. Neither are FHA mortgage insurance premiums, homeowner association fees, any additional principal payments you make, maid service costs, depreciation of your home or your utility charges.
So even though you still have to pay the electric bill and hire the kid down the street to mow the lawn, it's a small price to pay to have your own place and get all the tax breaks that come with it.
Did you know?
In total, more than 60 percent of Americans own their homes. That figure increases as Americans age, with more than 80 percent over the age of 65 owning their homes.
Source: U.S. Census Bureau