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 your tax advisor 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. To claim this deduction, you need to fill out “Schedule A”, under “itemized deductions” to record your interest deduction.
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. If your real estate taxes aren’t included on the statement, review your canceled checks to figure out the total amount of real estate taxes paid.
Deducting PMI (Private Mortgage Insurance)
If you buy a house with less than 20% down payment, you will most likely have to pay private mortgage insurance. However, according to the Tax Relief Act of 2006, homeowners can deduct their monthly PMI payments in Schedule A in the federal tax return. Homeowners with a VA loan, FHA loan and Rural Housing Administration loan also qualify. In order to qualify, the home loan must have closed after December 31, 2006 and the adjusted gross income can’t exceed $100,000 ($50,000 if married filing separately).
Check with your tax advisor or visit the IRS website to get more information.
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.
Tax Credits for Energy Efficiency*
The federal government is encouraging homeowners to think “green” by offering tax credits for those that make home improvements making their homes more energy efficient. For example, according to Energystar.gov, homeowners can get up to 10% ($500 max.) of the cost as a credit in their tax refund. To get a complete list of all the energy efficiency credits available, please visit the Energy Star website.
*These tax credits expire on December 31st, 2011.
Thinking about buying a home? Please call us at 800-251-9080 to talk to a home loan expert today! We can give you more information about purchasing a home and guide you through the process.