Tax Tips for Homeowners

If you own a home, you may already know that you can deduct the mortgage interest you pay
on your home, but what other tax advantages are lurking in that house?
One of the biggest challenges of owning a home is dealing with the tax laws, especially those
around points and cost basis. Just a little bit of knowledge can really clear up these frequently
confusing terms. Below, we will talk about mortgage points, cost basis, and capital gains.


According to the IRS, Points also called Loan discount or Discount Points, describe costs
which are a form of prepaid interest. Each mortgage discount point paid, lowers the interest rate
on your monthly mortgage payments.
In general, points to obtain a new mortgage, to refinance an existing mortgage, or paid on loans
secured by your second home are deducted ratably over the term of the loan.
But IRS said you can deduct all the points the same year you paid them if all of the following are

● You must use a cash method of accounting, meaning that you report income in the year
you receive them and deduct expenses in the year you pay them.
● The mortgage must be to buy, build, or improve your principal residence.
● Your principal residence secures your mortgage.
● Paying points is an established business practice in the area where the loan was made.
● The points paid weren't more than the amount generally charged in that area.
● You cannot have borrowed the funds to pay for the points from the mortgage lender or
● The points were computed as a percentage of the principal amount of the mortgage.
● The amount shows clearly as points on your settlement statement.

Cost Basis

Cost basis is the original value of an asset for tax purposes. The cost basis is quite easy to
calculate; it is simply the price you paid for the home plus any capital improvements that have
been made. Then you would subtract any seller-paid points, depreciation, and losses.
Capital improvements would be anything that increases the home's value such as swimming
pools and adding a room and more.

                                                              Capital Gains

If you owned the home (and lived in it) for at least two out of the last 5 years and sold it:
A single person doesn’t pay tax on capital gains of up to $250,000. For married couples and
qualifying widow/widower, the limit is $500,000.
So, as a married couple, you could purchase a home for $100,000 and sell it for $600,000 and
not owe any tax on the proceeds.
There are circumstances under which the two-year requirement is waived, such as health
issues, divorce, change of employment or an unforeseeable event.
In these cases, the amount of the exemption is based on the number of months the home was
lived in. For example, if you were single and lived in the home for 12 months, you would be
entitled to an exemption of $125,000, or half of the deduction allowed if you had lived there the
required two years.
For more information regarding mortgage points, cost basis, and capital gains, feel free to send
us an email via or text to 860-968-6060