Tax time is approaching, and if you're a property owner, you may be able to take advantage of several deductions that will help you save money in April.
If you have a mortgage on your home, some of the money you spend each year can be deducted from your taxes, including interest, property taxes, and insurance premiums. Even if you don't think your itemized deductions are enough to cover your entire tax bill, they can still amount to thousands of dollars in savings on your final payment.
Mortgage Interest
The interest on your mortgage is typically paid off first, with the remainder of each payment going toward paying down the principal. The good news is that you may deduct your interest payments on your primary (and sometimes a second) home up to $1 million ($500,000 if you are married and filing your taxes separately.).
It is one of the most common deductions claimed by individuals in the United States. This term refers to refinance, new mortgage loans, home equity lines of credit (HELOCs), and home equity loans. It can also refer to second mortgages. Tax-deductible interest on home equity debt applies to loans of $100,000 or less (or $50,000 if you're married and filing separately) for the whole year.
If you purchased a house in 2015, you might deduct (score!) another item from your income taxes: mortgage points. Borrowers pay for issues: discount points or loan origination fees. The interest on one percent of your loan amount is the same as a single point. Poulos states that many homeowners overlook this exemption.
For example, if you spent $500,000 purchasing a home in New York with a 1 percent origination fee, you could itemize the $5,000 deduction on your taxes.
In January, your lender should send you a copy of your settlement statement, with the loan origination fee and discount points noted. If you don't get one, ask for one and make sure this information is included before taking advantage of the reduction on Form 1098, Poulos advises.
The primary advantage of homeownership is the ability to deduct your annual property taxes. According to Poulos, you may deduct these payments in the tax year they are made rather than the tax year they were due.
A statement from your county's property assessor typically arrives at the beginning of each year, displaying how much you owe in property taxes. If you bought a home and the sellers reimbursed you for taxes they had already paid that year, it will be reflected on your settlement statement rather than your 1098.
If your down payment was less than 20 percent when you purchased your home, you're likely paying a mortgage insurance premium. The mortgage insurance premium deduction for 2016 includes policies provided by conventional private lenders, issued after 2006, as well as the Department of Veterans Affairs, the Federal Housing Administration, and the Rural Housing Service.
Your mortgage insurance premium payment is considered mortgage interest for tax purposes, allowing you to deduct it on Schedule A of Form 1040. Although the total premium you pay is deductible as interest, it phases out for high-income people. For example, if your adjusted gross income is above $109,000 (or more than $54,500 for married couples filing separately), you won't be able to deduct your mortgage insurance premium.
Although you reap some great benefits from being a part of the homeowners club, there are exceptions to what types of deductions you can take. For example, the following real-estate-related costs cannot be deducted:
Insurance for your home and title (other than mortgage insurance premiums)
Depreciation
Gas, electricity, and water are examples of utilities.
The majority of settlement costs (other than points)
Prepayments, down payments, and earnest money that has been forfeited
Home improvements financed with a personal loan, cash, or credit card
Fees for homeowners associations
Stamp taxes (transfer taxes) in an individual home sale
The tax deductions that come with buying a house have always been one of the most appealing aspects of the deal. Taking the standard deduction would be advantageous if your itemized deductions don't total as much as the standard deduction you're qualified for.
If you are unclear about specific tax laws regarding real estate, it would be beneficial to contact a licensed tax specialist for help. By doing so, you can take benefits of deductions that will lower the taxes you owe and keep more money in your pocket.
Like any other journey, homeownership has its challenges, but the tax benefits you accumulate along the way help make your house pay for itself in time.
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