by Tanya Davis
One of the biggest advantages of owning a home is taking tax deductions. These tax breaks are available for any type of home, whether a townhouse, condo, single-family home, or other. Here we discuss some of the more familiar tax deductions that may apply to you; be sure to consult with your CPA or tax advisor to learn which ones you can use.
In order to take advantage of home-related tax deductions, you’ll have to do a long form 1040 and also file a Schedule A – but that is usually a minor irritation compared to the amount of money you will save.
Mortgage Interest
Normally, the interest that you pay on your home’s mortgage is tax deductible. You can even deduct interest on multiple properties that you own, up to a value of $1 million. Even better, your “second home” can be a boat or even a camper, if it has facilities for cooking, sleeping, and a bathroom. The only criteria for this is that you actually used the money in question to buy, build, or make improvements on a home.
Generally, your lender will send you an IRS Form 1098 each year. This details the amount of mortgage interest that you paid over that year. To claim the deduction, record this item on your Schedule A.
Many homeowners are not aware that mortgage interest deductions may also include late payment fees and pre-payment penalties. This applies only if the fee is not for a specific service related to the loan.
Real Estate Taxes
Your property taxes are another item that is tax deductible. They are usually a large chunk of your monthly payment. You may pay these through escrow on your mortgage —if so the amount will be listed on your 1098. Otherwise, you may have paid them to your local municipality – check your cancelled checks for the amount. Property taxes can be deducted yearly at tax time for as long as you own the home.
Loan points
In the year that you purchase a new home, you can deduct the points you paid – and even the points that a seller may have paid for you. “Points” are a percentage of the loan principal. They are listed on your settlement statement. You can also deduct points you paid on a refinance. This deduction is a little trickier because the points have to be spread over the life of the loan. So if you took out a 30-year loan, you will deduct 1/30 of the total points each year at tax time. You can also back up and deduct points if you have refinanced in the past, paid points, and never took the tax deduction.
Interest on a Home Equity Loan
Home equity loans and lines of credit are tax-deductible up to $100,000, if the combined amount of your first and second mortgages total more than the value of your home. If the loans total more than your home’s value, you are limited. You can only deduct the interest on the home equity loan up to the difference between the home’s value and the first mortgage.
Some Costs are not Deductible
There are many tax advantages available to homeowners, but there are some expenses that are not tax deductible. Some of these include:
- Repairs
- Homeowners’ Association Dues
- Extra payments made toward the principal
- Closing costs
- Assessments, like new sidewalks or new utility hookups
- Insurance
At tax time, home ownership shows itself to be a worthy investment. It is possible to save thousands on your mortgage by utilizing tax deductions. Visit the IRS homeowner guide to learn more.
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