Tax season may feel like a burden for some Americans, but homeowners have plenty of advantages when it comes to claiming deductions.
The U.S. tax code is designed to offer incentives to homeowners, and by taking advantage of these breaks, 1040-filing citizens can maximize their financial investment in homeownership.
Whether a home is financed via a mortgage, or paid-in-full with cash, there are a multitude of tax-savings opportunities associated with owning a home. Of course, every homeowner’s financial situation is different, however, so please consult with a tax professional regarding your individual tax liability.
Tax Deduction : Mortgage Interest Paid
Mortgage interest paid to a lender is tax-deductible and, for some homeowners, can provide a large tax break — especially in the early years of a home loan. This is because a standard mortgage amortization schedule is front-loaded with mortgage interest.
At today’s mortgage rates, annual interest payments on a 30-year loan term exceed annual principal payments until loan’s 10th year.
Mortgage interest tax deductions are extended to second mortgages, too. Interest paid on refinances, home equity loans (HELOAN) and home equity lines of credit (HELOC) is tax-deductible as well. However, restrictions apply on homeowners who raise their mortgage debt beyond their property’s fair market value.
In addition, the Internal Revenue Service (IRS) imposes a $1 million loan size cap. Loans for more than one million dollars are exempt from this tax deduction.
Tax Deduction : Discount Points
Discount points paid in connection with a home purchase or a refinance are also tax-deductible. By way of definition, a discount point is a one-time, at-closing fee which gets a borrower access to mortgage rates below current “market rates”.
For example, if the market mortgage rate is 4 percent, paying 1 discount point may get you access to a mortgage rate of 3.75%. The IRS treats discount points as “prepaid mortgage interest” which, in turn, makes them tax-deductible in most cases.
When you pay discount points in conjunction with a purchase, the points may be deducted in full in the year in which they were paid. With respect to refinances, discount points are typically amortized over the life of the loan such that 1 point is deducted at 1/30 of its value per tax-calendar year.
There are additional qualifications to meet in order to claim discount points. Your accountant can help.
Other Deductions : Property Taxes, Renovations, Home Office
Real Estate Taxes
Homeowners typically pay real estate taxes to local and state entities. These property taxes may be deducted as an expense and income in the year in which they are paid. If your mortgage lender currently escrows for your taxes and insurance, you can expect an annual statement to file along with your federal tax returns.
For tax-paying homeowners, certain types of home improvement projects may be tax-deductible, too — specifically ones made for medical reasons. For example, if home renovations are made to accommodate a chronically ill or disabled person, and do not add to the overall value of a home, project costs are entirely tax deductible. Repairs made for aesthetic purposes are not eligible.
Homeowners who work from their residence can typically deduct expenses used for maintaining qualified home offices. These deductions include everything from renovations to the cost of utilities. However, there are several conditions for claiming home office space on your tax returns, and the rules can be tricky. Before claiming a home office, speak with an accountant to understand the benefits and potential liability.
Homeowners : Budget For Your Tax Breaks
Homeowner tax deductions reduce the annual costs of homeownership, but they’re far from a qualified reason to buy an actual home. Tax law can (and does) change frequently so consider whatever deductions to which you’re entitled a bonus.
Build your housing budget with the help of a tax preparer, if you’d like. Get a feel for how much home you can afford — before and after accounting for tax breaks. And, as you build your budget, make sure to use legitimate mortgage rates.
See more from Dan Green via What Are The Tax Benefits Of Homeownership?.