Tax benefits of home ownership

Dennis Norman

While much of the talk (including mine) about the real estate market is somewhat negative, there are some positive things to talk about; home prices have fallen back to levels they were at 7 years ago or more and home mortgage interest rates have hit the lowest levels in decades making a home more affordable than ever. This is a great opportunity for someone to buy a home, particularly if a first-time buyer that doesn’t have to deal with selling a home in the current market. In addition, provided Congress doesn’t take them away, there are tax benefits associated with owning a home that makes a home even more affordable.

To explore the tax-related aspects of home ownership I have done an E-View TM with Dan Elder a CPA and principal of Elder & Associates, PC. Lets begin:

Q- Dan, homes have become quite affordable as a result of the depressed

Dan Elder

Dan Elder, CPA

prices and record-low interest rates which may tempt a buyer, particularly a first-time buyer, into buying a home. What tax benefits are there to a home-owner that make home ownership even more affordable?


A- The most commonly known benefit is the mortgage interest deduction. It is an itemized deduction on your tax return and should yield a 20% to 30% decrease in income tax for the average taxpayer.

Secondly, your home can perform like a tax-sheltered savings account on steroids. You get a deduction for the interest but yet the economic gain is shielded from taxation. If the property is your residence for 3 out of the last 5 years, you are allowed to sell the home and receive up to $500,000 profit tax-free. In addition, there are NO limitations on the number of times you can do this (as long as you meet the residency requirement).

Finally, you can also borrow against your home without creating negative tax consequences.


Q- There has been some talk that Congress is considering doing away with the mortgage interest deduction – do you think this is likely to happen?

A- The home mortgage interest deduction has been around since before I began practicing in 1982. The subject of “doing away with it” comes up occasionally but never gets any traction. I believe this is for a number of reasons: First of all, the deduction has broad support across the entire taxpayer base and it is believed that home ownership stimulates the economy more than renting does. Second, the social planners in Washington want to increase home ownership. This is is a tool to effect the desired change.

Q- What is the most common mistake you see individuals make when doing their own tax returns when it comes to housing-related deductions?

A- The most common mistake I see is taxpayer’s deducting home mortgage interest expense that they are not entitled to. The total debt cannot exceed the lessor of the acquisition debt or $1 Million. Deductible home equity debt may not exceed $100,000. I also see frequent errors related to pro-rated property taxes in the first year a home is purchased…often times buyer and seller will deduct the amount of pro-rated taxes paid, rather than the person actually paying the tax bill at the end of the year deducting the entire amount.


Watch for more from Dan as we discuss other real estate related tax issues in the coming weeks. In the meantime, if you have questions or would like to reach Dan to discuss any tax-related issues, his contact info is below.

Dan Elder, CPA,
Elder & Associates, PC
Phone: 314.727.4300
Fax: 314.880.2022

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