Deduct the Interest on your Mortgage
This is probably the most well-known tax benefit for homeowners. With this deduction, you can deduct all the interest you pay towards your home mortgage with only a few exceptions. For example, your mortgage can not be more than $1 million, must be secured, and your mortgage must be on your primary residence. Also, don’t assume that if you’re married and file a joint tax return, you have to own your home together. The deduction counts whether you own the home, your spouse owns the home, or you own it together.
At the end of the year, your lender should give you a 1098 form, which will tell you the amount of interest you have paid. This prevents you from having to worry about keeping track of that all year. Also, in your first few years of home ownership, you pay more interest than principal, so that number your lender gives you could be high.
Deduct Private Mortgage Insurance
A PMI protects the bank in case you default on your mortgage. This type of insurance is often required on loans that require a low–down payment, like the FHA loan. For most years, PMI is largely not deductible but the rules surrounding that change every year. In 2016, if you made less than $109,000 a year you could claim a tax deduction for the cost of PMI for both primary and vacation homes.
Real Estate Taxes are Deductible
Real estate taxes are imposed by state or local governments on the value of your property. Most banks or other mortgage lenders will factor the cost of your real estate taxes into your mortgage and put those amounts into an escrow account. However, you can’t deduct the amounts paid into the escrow, but you can deduct the amounts paid out of it to cover the taxes. If you don’t escrow for real estate taxes, you will deduct what you pay out of pocket directly to the tax authority.
Capital Gains Tax Relief
Even though you just bought your home, resale value is something you should always have in the back of your head. You can exclude some of the gain attributable to your home when you sell. Which is different than other investments, for which you are taxed on the full value. You can currently avoid paying taxes on up to $250,000 of gain as long as you have lived in your home for 2 of the last 5 years.