You have heard it before. Owning a home is a great tax deduction. It is one thing to make a general statement. It is another to understand the specifics of how owning a home may lower your tax liability. Below is a list of important points that every homeowner should know. Note that this is not a complete list of allowable deductions.

Itemizing deductions. In order to deduct your mortgage interest, you must itemize deductions rather than take the standard deduction. As a general example, if your allowable standard deduction is $12,000 and you only have $6,000 in itemized deductions, you will be better off taking the standard deduction.  However, if the home gives you an “extra” $10,000 in itemized deductions, you are better off itemizing. Note that the “excess” $6,000 ($12,000 minus $6,000) will not garner any benefit because you are now itemizing. The standard deduction changes most years because it is indexed to inflation. 

The housing payment. The housing payment is generally comprised of four segments: Principal, interest, taxes and insurance (PITI).  Generally, you can deduct two of these—mortgage interest and taxes. The good news is in most cases these two items comprise the greatest majority of the total payment. For example, here are some fictitious numbers given to illustrate this point:

300 Principal
1,000 Interest
400 Taxes
50 Insurance
$1,750 Total Payment (PITI)

Of this example, $1,400 out of $1,750 is deductible, or approximately 80% of the payment.  

Again, using fictitious numbers, if the above homeowner was in a 25% tax bracket, the home payment would actually be reduced by approximately $350 per month after taxes.  There are a few exceptions or requirements with regard to this rule….

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