Four Tax Deductions Homeowners Need to Know
January 31st, 2012
January 31st, 2012
Buying a home can be a big investment. However, your home may provide you with tax advantages. Here’s a list of four common tax deductions for homeowners:
1. Mortgage Interest Deduction
In the early years of your mortgage, the majority of your monthly house payments goes toward interest. You may even have multiple mortgages – one for your main home and another for a second home or a home equity loan. As long as the purpose for these mortgages is to buy, build or improve a home, the interest is usually fully tax-deductible. The exceptions are if the interest on your mortgages exceeds $1 million, or the mortgage interest is for three or more homes. Your lender will issue you a Form 1098 for each mortgage, which explains exactly how much you can deduct. Be sure to keep these forms in case you’re audited by the IRS.
Note: If the loan is not a secured debt on your home, the interest cannot be deducted.
2. Property Taxes
The second biggest tax deduction you can take is for the taxes you pay on your home. Annual state and local property taxes can be deducted based on the assessed value of your property. However, property taxes are only deductible in the year in which they were paid. Also, if this is your first year in your home, be sure to deduct your share of the property taxes included on your settlement or closing statement for your home.
3. Mortgage Insurance Premiums
Homeowners who purchase a home (a main or second residence) with less than a 20% down payment must carry private mortgage insurance (PMI). This insurance protects the lender if the homeowners default on the loan. You must itemize your deductions to claim the PMI deduction. You also need to have an adjusted gross income (AGI) of less than $100,000 for single, married or head of household taxpayers, or $50,000 if married filing separately. Once your AGI is above $109,000 ($54,000 for married filing separately), you no longer qualify for this deduction.
When you purchase or refinance your home, points are the fees paid to obtain the mortgage. If this is your first year in your main residence, you can deduct the points you paid at closing on your tax return for the year you paid them. If the seller paid some or all of the points for you, you may still be able to deduct them. Ask your tax advisor. If you refinanced your mortgage, you can deduct the points proportionately over the life of the new loan. Also, if you still had points you were deducting on a previous refinance, you can write off the rest of the points in the year of the new refinance.
Since taxes from owning a home can be confusing, you should always talk to your tax advisor to determine what deductions apply to your particular situation. Also, make sure you keep excellent records, so you can take advantage of deductions.
If you’re looking to buy a new home or refinance in 2012, contact Grandview Lending. We can review your particular situation to find the right mortgage solution for you.
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