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Tax Advantages of Home Ownership

The information provided below is for general educational benefit only. Please consult your tax advisor of choice when using any of this information and when making important tax-related decisions!

One of the most important tax advantages of home ownership is the deduction of mortgage interest on your principal residence. If you itemize deductions on Schedule A of your federal income tax return, you can generally deduct the qualified residence interest that you pay on certain home mortgages taken on your principal residence. (This also applies to second homes.) That is, you may be able to deduct the interest you've paid on a mortgage to buy, build, or improve your home, provided that the loan is secured by your home.  The IRS refers to this type of mortgage as acquisition indebtedness. Your ability to deduct interest depends on several factors.

Up to $1 million of acquisition mortgage debt ($500,000 if you're married and file separately) qualifies for interest deduction. (Different rules apply if you incurred the debt before October 14, 1987.) If your mortgage loan exceeds $1 million, some of the interest that you pay on the loan will not be deductible.

Although this deduction also applies to certain home equity loans secured by your home, the rules are different. Home equity debt involves a loan secured by your main or second home that exceeds the outstanding mortgages on the property. Home equity debt is limited to the lesser of:

The fair market value of the home minus the total acquisition debt on that home, or $100,000 (or $50,000 if your filing status is married filing separately) for main and second homes combined.

The interest that you pay on a qualifying home equity loan is generally deductible regardless of how you use the loan proceeds. For more information, see IRS Publication 936.

Other real estate-related possible tax deductions to investigate include:

  • Home Improvements - Improvements increase your tax basis but lower your taxes when you sell.
  • Deducting points and closing costs - Lender charges to secure the loan when you purchase.
  • Exclusion of capital gain when your house is sold.
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