One of the reasons people decide to buy their very own home is because of the tax breaks. You will be able to deduct different expenses associated with owning a home, such as private mortgage insurance, real estate taxes, and mortgage interest. If you’re a first time homeowner, you need to learn more about tax deductions, as it will greatly reduce your tax bill.
Mortgage Interest
Deducting mortgage interest is probably the biggest tax break most homeowners can take an advantage of. If you took out a loan of up to $1 million in order to buy or improve your home, you will be able to deduct interest on it. You should also know that even if you take another mortgage for a second home, it will also count towards the million dollar limit. In January, you will receive Form 1098 that will contain how much interest you paid during the previous year, which is exactly the amount that you can deduct on Schedule A.
Real Estate Taxes
Property taxes are used by your local government in order to fund functions like emergency services, parks, schools. Most homeowners consider this to be a big expense. However, the good news is that the local property taxes that you pay every year are deductible.
If you pay taxes through an escrow account, then you will see the amount that’s deductible on a form you receive from your lender. In case you pay taxes to the municipality directly then you will need to check your records. In most cases, homebuyers reimburse the sellers for real estate taxes that they have paid in advance for the time you owned the home. If that was the case when you bought your home, then you will see the deductible amount on your settlement sheet.
Prepaid Interest Deduction
Chances are that you had to pay “points” to your lender in order to get a mortgage for your house. In other words, you basically paid the lender a percentage of the loan amount when you took out your mortgage. However, the good news is that these points are 100% deductible in the year that you paid them.
If you paid three points (3%) on a $250,000 mortgage (3% of a $250,000 mortgage equals $7,500), then you are able to deduct the points but only if you put at least $7,500 of your own money into the deal. What’s even more interesting is that you’re able to deduct the points even if the seller paid them for you as part of your agreement. You will see how many points you paid on Form 1098 that you will receive from your lender. Points (prepaid interest) are reported on Schedule A.
Vacation Home Tax Deductions
Although vacation home tax deductions may seem a bit complicated, you won’t have a problem with deducting them as long as you keep good records of when and how your vacation home is used. For example, if you’re the only one that uses your vacation home (in other words, you don’t rent it out for 14 or more days a year), then you will be able to deduct both property taxes and mortgage interest on Schedule A.
However, if you decide to rent your vacation home for more than two weeks a year (and personally use it less than 15 days a year), then it’s treated like a rental property and you will have to deduct your expenses on Schedule E.
Home Improvements
Although you won’t be able to deduct expenses on your home improvements now, you will be able to include the cost of the improvements in the purchase price of your home when you decide to sell it. This is why you should save all records and receipts for all improvements that you’ve made to your home. This will help determine the cost basis in your property for tax purposes. Even though home-sale profit is now usually tax-free, IRS can sometimes demand part of the profit when you sell it, so if you keep track of your basis it will definitely help in limiting the potential tax bill.