Owning a home offers you a lot of tax advantages that aren’t available to renters. For starters, you will be able to deduct points used to obtain your mortgage. You can also deduct mortgage paid during the year and property taxes.
There are, of course, rules and guidelines to these deductions. Though both lenders and realtors who inform you of these deductions most likely have your best interest in mind, they may be a little unsure about exactly what will and won’t be deductable. That is why it will serve you well to understand it ahead of time.
What are points and how do they work? When you obtain a mortgage, you will take on costs, one of which will be the loan origination fee. This is usually a percentage of the loan amount and is generally shown in points. For instance, one point on a $150,000 loan would be $1500. The loan origination fee must be express in this way in order for it to be tax deductable.
So how does the point deduction process work? When you purchase a home, points are deductable within the year they are paid. This must meet certain conditions before any deducting can take place. First, the mortgage for the home you predominately live in must be secured. You are also required to have either used this mortgage to buy or build your home.
Your lender is prohibited from inflating the points to include normally charged items. These include: title insurance, appraisal fee,, settlement fees, and property taxes.
The cash you put in should also be higher than the amount you are charged in points. For example, if you only had to put in $2000, but your points equal $3000, chances are your lender is inflating the loan amount to cover your points. Though a lender can do this, you can’t deduct the points should it occur. The IRS will spot it and know something is up.
The points must also be clearly stated on the HUD1 Settlement Statement. You will receive this document after closing. It clearly lays out the costs associated with the purchase of the home. The seller will receive this document as well.
The decision to buy a home is an important one. It means shelling out a lot of cash for an investment that should net you a good return. It’s important to know the income tax deductions you will be allowed in order to get the most out of your new purchase. Before deducting anything, make sure it is permitted. Otherwise, you’ll spend a lot of time making and possibly explaining changes later on. Talk to your realtor as well as someone from a mortgage company concerning your possible tax deductions. Contact the IRS to ask specific questions and obtain clarifications.