There are 4 simple ways in which owning a home can Save you in taxes:
1. Mortgage interest deduction – owning a home allows you to deduct the interest you pay for your mortgage. This is usually the biggest tax break for most people because a large portion of your house payment goes toward interest. This is especially true at the beginning of a mortgage. You can deduct all the mortgage interest you pay given that your loan is for less than $1 million. This includes any interest you pay on a loan to buy your home, the interest on a home equity line of credit, or home equity loan.
2. Real estate tax deduction – owning a home also gives you the benefit of being able to deduct real estate taxes associated with your home. This is usually the second highest deduction you take in owning a home.
3. Points deduction – When you finance a home, you may pay what are called “points.” Points lower the interest rate on your mortgage by effectively prepaying a portion of the interest at closing. Points are paid by the borrower to the lender as part of the loan deal and they are a percentage of the loan. Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points. Points are amortized over the life of the loan. So while you don’t get the full deduction up front, you do get the full deduction over time.
4. Tax savings on the gain when you sell – When you’re ready to sell your home, a large amount of your gain from the sale is tax-free if you meet certain criteria. The rules are broken down into two categories: married and single. If you are married, you can earn up to $500,00 on the sale and you won’t have to pay tax on the earnings. If you are single, you can earn up to $250,000 without paying any federal tax. There’s only one requirement: You have to own and occupy your home for at least two of the past five years.
Check out IRS Publication 530 for all Official tax guidance on home ownership: http://www.irs.gov/uac/Publication-530,-Tax-Information-for-Homeowners-1