Homes: a Tax Shelter you Can Live in

by : Kelli Bennett

Tax and legal benefits may not be the first things on the minds of home buyers, but they provide some of the best reasons for owning a home. Well-informed buyers know that homes double as great tax shelters, allowing owners to deduct tens of thousands every year for a wide variety of income tax categories. The best part is that they provide a tax shelter you can actually live in.

Most tax and legal benefits apply to primary residences, so it's important to understand how these are defined. The Internal Revenue Service has no absolute rules for defining these homes, but it does rely on a variety of common guidelines to identify them. Wealthy home owners and investors who own several homes may even have difficulty figuring out where their primary residence is, especially if they consider it to be a place where they don't necessarily spend the majority of their time. In uncertain cases it may be up to the home owner to prove to the IRS with phone records, bills paid, and other documents that they spend most of their time in the place they call their primary residence. Primary residences can even be rental properties, although an investor with several real estate holdings would likely want to claim the tax benefits of a property he or she owned. To determine a primary residence the IRS may also look whether a particular home has been claimed as a primary residence in the past, and how long the investor or buyer has owned it.

Home owners can also qualify for some tax benefits with second homes and non-primary residences. In these cases they must show that debt for these homes totals less than 1.1 million, the current limit for tax-claimable acquisition debt, which is raised every year to keep pace with inflation.

The tax benefits of home ownership fall into five main categories: deduction of mortgage interest; tax treatment of real estate taxes; tax treatment of home improvements and repairs; closing costs; and exclusion of capital gain when the house is sold. While the benefits cover many aspects of home ownership and are exciting, it's important to remember that they can only apply to acquisition debt under the tax-claimable limit (currently 1.1 million). Acquisition debt covers all debt incurred while constructing, acquiring, or improving a home owner's primary or secondary residence.

If your total acquisition debt falls below the tax-claimable limit, you'll be able to claim relief for all interest paid on the loan, all real estate taxes paid to the taxing authority (except generally those held in escrow), some or all of the closing costs associated with buying a home, and capital gain when your house is sold again - if you sell your house for more than what you paid for it, the extra money you receive can be tax-deductible.

Knowing the tax and legal benefits of owning a home can save you money at tax time, and help you make a better buying decision. Be sure to stay current on these benefits, as they tend to change year-to-year, and could result in more money saved than you were expecting.