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>Mortgage Interest Deductions

You can deduct the interest on your home loan and the real estate taxes you pay on the home. Mortgage interest is deductible up to $1 million, $500,000 if Married Filing Separately as long as you use the money to buy, build or improve on your home and the loan is secured by your home.

Plus, the interest you pay on loans secured by your home and used for a purpose other than to buy, build or improve your home is deductible for loans up to $100,000 ($50,000 if you're Married Filing Separately). The limit may be reduced depending on the market value of the home at the time you take out the loan.

Points or origination fees paid when you purchase your home generally are completely deductible in the year you pay them. Alternatively, you may choose to amortize the points over the term of your mortgage. This choice is usually made only when your itemized deductions are less than the standard deduction for the year you bought the home.

Points paid to refinance a loan must be deducted over the term of the loan. If you deduct points over the term of the loan and sell the home or refinance it again before the loan expires, you can deduct in the year of the sale or refinancing any points that you didn't previously deduct.

Personal Residence Capital Gain Exclusion

When you sell your home, the IRS allows you to exclude the gain on the sale from taxable income, up to $250,000 if single, and $500,000 if you're Married Filing Jointly and you both meet the use requirement.

You can claim the exclusion if you own and used the home as your main residence for at least 2 years during the 5-year period ending on the date of sale. You may claim this exclusion only once in any 2-year period.

If you don't meet the 2-year requirement, you may be eligible to claim a reduced exclusion, if you sell your home because of an unforeseen circumstance, such as a change in employment or a divorce. A loss on the sale of your home, however, isn't deductible.

Buying a home is a great way to reduce your income tax. The qualified mortgage interest you pay and your real estate taxes are both deductible.