Tax consequences should be taken into account in any decision to rent versus buy. In most cases, paying rent will not offer any tax breaks. An exception may occur, though, if you keep a home office: with an office that takes up 10 percent of your home, you can deduct 10 percent of your rent.
Homeowners can take home office deductions, too. With a 10 percent home office, for instance, you can deduct 10 percent of your costs for utilities, security monitoring, homeowners insurance, etc., as well as taking depreciation deductions. Moreover, for your primary residence and one vacation home, you can deduct the interest on mortgages up to $1 million as well as the interest on a home equity credit line up to $100,000.
In addition, after living in a home for at least two years, you qualify for yet another tax break. Up to $500,000 worth of gains on the sale of a principal residence are exempt from capital gains tax, if you file a joint return. (Single filers can exclude gains up to $250,000.) This tax break can be used over and over, as you move up the housing ladder.
