How to Calculate the Tax Impact of Owning a Home

by C. Taylor

Owning a home potentially offers an enormous tax reduction by itemizing your deductions. When you first purchase a home, the majority of your mortgage payment is interest, and this interest is deductible. Likewise, points paid to reduce your interest rate may also be deductible. Although expenses used to improve a property are not immediately deductible, any repairs are. The downside to itemizing your deductions to reap home ownership benefits is a more complicated return and forfeiture of the standard deduction.

1. Look at your year-end mortgage statement for information on points and interest paid, taxes and insurance. If you do not have this statement, contact your mortgage company. If you are attempting to assess the tax benefits before purchasing, ask your mortgage company for estimates of these figures.

2. Write down the real estate taxes paid for your property. As an example, you might have paid $2,500 in real estate taxes for your home.

3. Add any interest or interest points paid during the year to this figure.In the example, if you paid $11,000 in interest and paid $3,000 in points when initiating your loan, your total would be $16,500.

4. Add any mortgage insurance premiums. The full amount only applies if your adjusted gross income was less than $100,000, or $50,000 for "married filing separately," as reported on line 38 of your Form 1040 taxes. For amounts greater than this, subtract $100,000 and round up to the nearest $1,000. For married filing separately, subtract $50,000 and round up to the nearest $500. Divide by $1,000, or $500 for married filing separately. If the resulting figure is greater than 1.0, use 1.0. Subtract this figure from 1 and multiply by the mortgage insurance premiums to calculate the amount you can deduct. In the example, if you are single and paid $2,000 in mortgage insurance with an adjusted gross income of $102,100, then you would subtract $100,000 to get $2,100, which rounds up to $3,000. Divide by $10,000 to get 0.30. Subtract this from 1 to get 0.70. Multiply by the $2,000 in premiums to get a deductible of $1,400. Your new total is $17,900.

5. Add any other itemized deductions, such as medical expenses, charitable gifts, state taxes and job related expenses. In the example, if you had $4,000 in additional itemized deductions, your new total would be $21,900.

6. Subtract your standard deduction from this figure to see how much more more you could save by owning a home. If you get a negative number, you are better offer using your standard deduction, and the home has no tax benefit. In the example, your year 2010 standard deduction is $5,700, so you get an additional $16,200 in tax deductions.

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