Tax Tips for Homeowners

When tax time rolls around, owning a home will definitely have advantages. Consulting your tax advisor is the smartest thing to do in this situation because he has the ability to make sure you don’t miss out on any important home-related tax deductions.

Mortgage Interest Rate Deduction

Normally, interest paid on a home mortgage is tax-deductible. You are allowed to deduct interest on multiple mortgages, as long as they add to more than $1 million. If you take this route then make sure the money is used for buying, building or improving your home.

You will receive a yearly “Form 1098” from your lender which details how much mortgage interest you have paid. You will then need to fill out a “Schedule A” under “itemized deductions” to claim and record your interest deduction.

Home mortgage interest deductions will also include pre-payment penalties and late payment charges that were not for a specific service received in connection with your home loan.

Real Estate Tax Deduction

Real estate taxes are also tax-deductible. If the taxes on your homeowner’s insurance were placed in an escrow account when you closed your mortgage then the amount of real estate taxes you paid will be listed on your interest statement. If your real estate taxes are not included on the statement, then review your cancelled checks to figure out the total amount of real estate taxes paid.

Deducting Loan Points Paid on a Purchase

Points paid on a loan for a home purchase are only tax-deductible the year the purchase was made. It is okay to deduct the points you paid as well as those a seller paid on your behalf if you meet the following criteria:

Your primary residence must secure the loan.
The loan was used to buy, build or improve the home.
Paying points is a common practice in the seller's geographic area.
Points are calculated as a percentage of the loan principal.
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 equal if not more than the amount you were charged for the points you paid on the loan.

Deducting Seller Concessions

In an effort to assist the buyer with his loan closing costs, the seller has the option to contribute money to the buyer. On average concession is 3% of the sales price (with less than a 10% down payment).

Seller concessions may go towards closing costs, discount points, pre-paid items such as per diem interest, escrows, and tax pro-rations buying down the interest rate. Again, seller-paid points are tax-deductible.

Deducting Loan Points Paid on a Refinance

Deducting any points paid to buy down the mortgage rate could be an option if you have refinanced in the last year. The deduction must be proportionate to 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.

Important tax opportunities are often missed by many homeowners. If you have refinanced more than once, you can deduct unclaimed points from an earlier refinance. Let’s take an example:

Say you refinanced in 2003 and paid points. 1/30th of those points were deducted in 2003 and 2004. Rates continued to drop, so you decided to refinance again in 2005, paying off the 2003 loan. The remaining points you have not yet deducted can now be deducted in 2005. Instead of refinancing, you could also use this deduction if you sold the house in 2005.

Home Equity Interest Rate Deduction

Interest paid on home equity loans or any line of credit may be tax-deductible up to $100,000. If combining the amount of your second and first mortgages total more than the property's actual value then the deduction may be limited. 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).

If you would like to learn more about the tax savings associated with homeownership, try our Tax Savings Calculator. You can also call us at 866-882-ZERO and talk to a refinance expert today. As always, please consult your tax advisor.

As always, you should check with your tax advisor to determine which of these deductions apply to you!