Buying a home is a huge financial investment, but luckily Uncle Sam has your back in the form of tax breaks. With your new home purchase, you get to write off several deductions come next tax season – and it’ll certainly save you a good chunk of money. So, make sure you know about these typical homeowner tax breaks:
1. Mortgage Interest
Most likely, you’re biggest tax break will come from deducting the mortgage interest you have paid over the last year. By law, you’re allowed to deduct interest up to $1 million of debt used to purchase your house. In addition, if you’re paying private mortgage insurance (PMI), those premiums are tax deductible as well.
In January, your lender will send you the appropriate tax forms (FORM 1098) detailing the mortgage interest you paid the previous year. Be sure the 1098 includes any interest you paid from the date you closed the house to the end of that month. You can find that amount on your settlement sheet for the home purchase, and you can deduct it even if the lender does not include it on the 1098.
When you get approved for a mortgage loan, your lender will typically charge you a variety of fees, one of which is called points (also called origination fees). One point is equal to 1% of the loan principal. You can deduct these points even if the seller paid those closing costs.
For example, if you paid two points (2%) on a $300,000 mortgage (i.e. $6,000), you can deduct those points as long as you put at least $6,000 of your own cash into the deal. The deductible should be shown on your 1098 form.
3. Property Taxes (or Real Estate Taxes)
Another major deduction you can file are the property taxes on your home. A large part of mortgage loan payments is taxes, which goes into an escrow account for payment once a year. These property taxes are fully deductible for income tax purposes, and will be an annual deduction as long as you own the home.
If this is your first tax year in the house, make sure to look at the settlement sheet you received at closing and find additional tax payment data. When the property was sold to you from the previous owner, the year’s tax payments were divided, so that you pay the respective portion. This share of the taxes are still deductible, even if they don’t show on your 1098 form.
4. Selling Your Home
When you decide to sell your home and move to a new property, you’ll be able to avoid some taxes on the profit you earned. To be eligible, you must have owned and lived in the house for at least 2 of the 5 years before the sale. Up to $250,000 of profit is tax-free, if filing alone (filing with a spouse, you are eligible for up to $500,000). As a result, most taxpayers won’t owe any tax on the home-sale profit, saving you tons of money.
More Tax Breaks
We’ve only covered some of the most common tax breaks homeowners can deduct in the article above. If you’d like to learn more about other tax breaks you might be eligible for, feel free to talk to us or one of our preferred mortgage lenders. We’ll be more than happy to assist you.