Homeowner Deductions
Homeownership comes with a lot of advantages, especially when it comes to tax time. Make sure you’re not missing out on important home-related tax deductions. As always, please consult us to find out which deductions apply to you. Deducting Mortgage Interest
The interest you pay on a home mortgage is usually tax-deductible. You are allowed to deduct interest on multiple mortgages, as long as they add up to less than $1 million. The one criteria being that the money was used for buying, building or improving a home.
Every year, you should receive a “Form 1098” from your lender which details how much mortgage interest you paid.
Home mortgage interest deductions can also include late payment charges and pre-payment penalties. The only requirement is that they were not for a specific service received in connection with your home loan.
Deducting Real Estate Taxes
Real estate taxes are also tax-deductible. Your interest statement should list the amount of real estate taxes you paid if your taxes and homeowners’ insurance were placed in an escrow account when you closed on your mortgage.
Deducting Loan Points Paid on a Purchase
The points you pay on a loan for a home purchase are tax-deductible for the year you made the purchase. You can deduct the points you paid as well as those a seller paid on your behalf (see next item) if you meet the following criteria:
- The loan is secured by your primary residence;
- The loan was used to buy, improve or build the home;
- Paying points is a common practice in the seller’s geographic area;
- The points are calculated as a percentage of the loan principal;
- The points are clearly outlined on the buyer’s settlement statement; and
- The amount of cash you put into the purchase of your home (down payment, closing costs, etc.) is at least equal to the amount you were charged for the points you paid on the loan.
Deducting Seller Concessions
Sometimes, the seller will contribute money to the buyer to help cover the buyer’s loan closing costs. The average concession is 3% of the sales price (with less than a 10% down payment).
Seller concessions can go towards buying down the interest rate, closing costs, discount points, and pre-paid items such as per diem interest, escrows and tax pro-rations. Again, seller-paid points are tax-deductible.
Deducting Loan Points Paid on a Refinance
If you refinanced in the last year, you may be able to deduct any points you paid to buy down the mortgage rate. These points must be deducted proportionately over the life of the loan. For example, if you took out a 30-year mortgage, you would deduct 1/30th of the points each tax year.
Many homeowners have overlooked an important tax opportunity. If you have refinanced more than once, you can deduct unclaimed points from an earlier refinance. Let’s take an example:
Deducting Interest on a Home Equity Loan
Interest paid on a home equity loan or line of credit may be tax-deductible up to $100,000. However, the deduction may be limited if the combined amount of your second and first mortgages total more than the property’s actual value. For example:
Your home is worth $150,000 and you have a first mortgage for $125,000 and a home equity loan of $40,000. The two mortgages combined equal $165,000 – that’s $15,000 more than the value of your home. That means you can only deduct the interest on your home equity loan up to the amount of $25,000 (the difference between your home’s value and your first mortgage).
