Home ownership has traditionally been part of the American dream. Being a homeowner can also help individuals save on taxes. There are several expenses associated with owning a home that can produce a tax deduction now or in the future.
The most common expense that homeowners incur is their mortgage on the house. The amount of interest paid in the calendar year is reported by the lending institution to the homeowner on a form 1098. This amount is deductible by the mortgagee in the year it was paid.
Many homeowners often use the equity in their home to take out a home equity loan. The proceeds of the loan can be used to purchase various items. As long as the loan is secured by the house the interest paid on the loan is deductible. Be careful though, if the proceeds of the loan were not used to improve the property itself, then the interest is not deductible for alternative minimum tax purposes.
Often, to get a lesser annual interest rate, individuals will pay points on their loans. These points are a fee paid up front to the lending institution. The lending institution will report to the homeowner the amount of points paid in the current year. Points paid on a loan to acquire a home are deductible in the year paid. Points paid on a loan to refinance a home must be deducted ratably over the life of the loan.
New homeowners often do not have a substantial down payment for their property. Therefore, the lending institution will require that the mortgagee pay mortgage insurance premiums. These insurance premiums may be deductible. Again, the lending institution will report the amount of qualified premiums to the homeowner. The deduction for the premiums begins to phase out for most taxpayers when adjusted gross income reaches $100,000. However, this is a temporary tax break. It's effective for mortgage insurance policies issued on or after January 1, 2007 through December 31, 2013.
Most communities also require that homeowners pay real estate taxes on their property. These real estate taxes are a deductible expense in the year they are paid. Be careful though, items like special assessments, garbage collection, fire charges or sewer and water charges are not deductible. In addition, while these taxes are deductible for regular tax purposes they are not deductible for the alternative minimum tax.
Improvements and special assessments for your home will not produce a current tax deduction. However, taxpayers should keep receipts for these items as they add to the cost basis of your property. When the time comes to sell the property taxpayers must determine the gain or loss on the sale of their property. The gain or loss on the sale is determined by comparing the selling price to the cost basis of the home. As the law stands now, most gains on the sale of a principal residence are not taxable. However if the rules change or you fall under an exception to the nontaxable rule you will be ready to compute your gain if you save the proper information.
By taking advantage of these tax saving deductions, homeownership can be both financially and emotionally rewarding. Please call if you would like further information.