3 Tax Breaks Homeowners Shouldn't Forget

There are plenty of good reasons to own a home. Maybe you're tired of paying rent every month and having no equity to show for it. Or maybe you just want to live in a certain neighborhood where there's no rental market to speak of. If that's not enough, then consider that buying a home could potentially save you thousands of dollars on your taxes each year thanks to the tax breaks below.

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Deduction for mortgage interest (and more)

If you have a mortgage on your home, then you can deduct the interest you've paid from your taxable income -- and the limits are pretty generous. You can deduct all the interest you pay on a mortgage whose original principal balance was as high as $1,000,000 for most taxpayers, or $500,000 if you're married filing separately. These limits apply to mortgages you took out to buy, construct, or improve your primary or second home (but not an investment property), and they also apply if you refinance any loans you took out for these purposes, up to the principal balance of the original loan.

You can also deduct the interest you pay on home equity debt, although the limits are one-tenth of the mortgage principal limits. Most taxpayers can deduct interest on up to $100,000 of home equity debt, while married separate filers can deduct interest on up to half of that amount.

In addition to the actual interest you pay on your mortgage debt, you can also deduct "discount points" you pay up front when you get your mortgage. If you obtained the loan to buy or build your home, you can typically deduct this expense in the year you pay it. However, if you refinanced or borrowed money for any other purpose, you can still deduct those points, but the deduction must be amortized over the term of the loan.

Finally, the cost of private mortgage insurance has been deductible in previous years (subject to income limits), though this technically expired at the end of 2016, and as of this writing it's unclear whether the deduction will be extended for 2017.

Property taxes are deductible, too

The average household spends $2,127 on real estate taxes per year, but the good news is that this expense is deductible. Depending on where you live and the value of your home, this could be a big tax break. As my colleague Maurie Backman pointed out recently, the average property tax bill in New Jersey in 2015 was a whopping $8,353. For the average New Jersey homeowner in the 25% federal tax bracket, this deduction translates to $2,088 in tax savings.

It's also worth mentioning that in order to take advantage of the property tax and mortgage interest deductions, you need to itemize deductions on your tax return. Here's a discussion that could help you determine whether you should itemize or take the standard deduction.

Rent out your home (or part of it) -- tax-free

This is a tax break that could come in handy given the growing popularity of Airbnb and similar home-rental services. Generally speaking, if you use your home for both rental and personal purposes, then you need to divide your total expenses between the two types of usage and figure out your taxes accordingly.

However, there is a special rule that says if you use your home as your residence and rent it out for fewer than 15 days, then you don't need to report any of the rental income or deduct any home expenses as rental expenses. Simply do your taxes as you normally would, and the rental income you collected is yours -- tax-free.

This could be quite lucrative, depending on the type of home you have and its location. For example, let's say you live in a popular vacation destination such as South Florida and are going to be travelling for two weeks around the holidays. You could rent your home out for those two weeks to vacationers on Airbnb, VRBO.com, or another site/app, and potentially earn hundreds or even thousands of dollars in tax-free income.

Your home may be the biggest expense of your entire life, but the government has made a point of encouraging homeownership with a long menu of potential tax breaks. Don't pass up a single one that you're entitled to.

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