The mortgage interest deduction will reduce the tax bill for a majority of homeowners. In order to take advantage of this deduction, however, you’ll have to itemize your deductions and that figure must exceed the standard deduction. In 2006 the standard deduction for single taxpayers will be $5,150; for head of household it will be $7,550 and for married couples filing jointly it will be $10,300. Usually when homeowners count mortgage interest, property taxes and other non-home deductions, their itemized totals easily surpass their standard deductions.

All costs related to your home are not deductible. There is no home improvement tax deduction; property insurance is not deductible nor are association fees if you live in a condo. If your lender demanded private mortgage insurance, that is not deductible either. Basic repairs, maintenance – all of these are non-deductible, business-as-usual costs. So even though there is no home improvement tax deduction what you can and should do is keep track of your home improvement expenses. Those costs will add to your home’s basis cost, which when you sell is subtracted from the sales price to determine your profit – and in turn, determine whether any of the profit is taxable.

There is no more capital gains tax on a primary residence; single people are allowed to take the first $250,000 tax free and married couples are allowed $500,000 in non-taxable profit. Your home improvement costs over the years, when added to the cost of the home, may turn into a home improvement tax deduction of sorts when you sell the house. You are no longer required to take the returns on your home sale and buy another residence in order to avoid capital gains taxes.

It is true that real estate, like any other asset, has the potential to go down as well as up in value. While you maintain your mortgage interest deduction as long as you are paying for the home but you cannot write off any loss you suffer if you must sell your main residence for less than what you paid. The reason this is true for homes and not for investment assets is that your residence is considered personal property. There are taxes on the sale of personal property, but no provision for a tax write off if there is loss of value.

Many people got into interest only loans by convincing themselves that the mortgage interest deduction justified it. The fact is that most of those people took interest only loans so they could maximize the house purchase dollars. Five years from now when their income may have increased substantially a mortgage interest deduction may be of real value – it may in fact be what keeps them in the house. Some interest only loans readjust to payment increases of 50% or more.

Source: Staff Writer