Tax Breaks for Homeowners

Buying a home is a great moment in life. It gives a great feeling of having “arrived,” of starting a new chapter. But make no mistake, owning a home is a huge fiscal responsibility, probably the biggest one you’ll ever have. Besides the mortgage payments, there’s insurance, property taxes, maintenance costs, the list goes on.

Uncle Sam knows just how big a deal owning a home is, so the tax law provides several ways for your home ownership costs to cut your taxes. Certain expenses are deductible, provided you itemize deductions. Let’s look at some of these deductions.

Deducting Mortgage Interest

If you’re paying monthly mortgage payments for your home, you may be able to deduct the interest on your payments. You may qualify for the interest deduction on up to two qualifying homes. To be eligible to deduct the interest:

  • You must have taken a loan to buy, build, or seriously improve a home.
  • The loan must also be secured, meaning that you signed a mortgage agreement, deed, or land contract. If you got the loan from family or friends, they must take the legal steps to secure the loan, or you can’t deduct the mortgage interest.

You may deduct the interest if the combined mortgages, for either one or two homes, is $1,000,000 or less. If married filing separately, the maximum home acquisition debt is $500,000.

You should receive Form 1098 or a similar document from your mortgage holder stating how much interest you paid for the year. When it comes time to do your taxes on, just fill out the Form 1098 screen with all the info.

No 1098? No problem! Just fill out the Interest You Paid screen instead. (Careful: it’s either one screen or the other – never fill out both screens for the same loan.)

Deducting Home Equity Loan Interest

You may also be able to deduct interest paid on a home equity loan. A home equity loan is often used for home improvement projects. You may deduct the interest if the loan does not exceed $100,000 (if married filing separately, the maximum is $50,000).

Savings tip: Borrowing against your home with a home equity loan is a better way to borrow money than using credit cards. Home equity loans typically have a lower interest rate, so you can pay down the debt faster. The downside: If you borrow against your home and fail to repay the loan, you risk losing your home.

Deducting Real Estate Taxes

Real estate tax is also deductible. The tax for your home is often included in your mortgage payment. Your mortgage holder will hold the tax amount for you until it’s time to pay the tax, and will make the payment for you. If this is the case, the mortgage holder will send you a statement showing how much real estate tax was paid for your property.

But even if you pay your real estate tax yourself, you can still deduct any real estate tax paid.

As with home mortgage interest, enter the real estate tax on our Form 1098 screen (or the Interest You Paid screen if you didn’t receive a Form 1098).

Deducting Private Mortgage Insurance

If you bought your first home with less than a big downpayment, the mortgage holder may have required you to take out private mortgage insurance (PMI). You can take your premium payments as an itemized deduction on your return. But if you prepay for several years, you can only claim premiums allocated for that particular tax year.

To deduct PMI, enter on the Form 1098 screen or the Interest You Paid screen.

Deducting Points

A point refers to certain charges paid or treated as paid by you to get a mortgage. Your mortgage documents should list the charges that are included.

When deducting points, you have a choice: you can either deduct them all at once, for the tax year paid them, or you can stretch them out, deducting a percentage each year you have the mortgage.

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