Home Ownership and Taxes

From mortgage points to PMI, unlock the essential info about how home ownership affects your taxes.

All those forms you had to fill out to buy the house were just the beginning; you have years of mortgage and insurance paperwork to look forward to and, of course, taxes.

Here are six tax benefits for first-time (and some longtime) home buyers:

1. You can deduct the interest you pay on your mortgage

The home mortgage interest deduction is probably the best-known tax benefit for homeowners. It lets you deduct all the interest you pay toward your home mortgage with a few exceptions, including these big ones:

• Your mortgage can’t be more than $1 million.
• Your mortgage must be secured by your home (unsecured loans don’t count).
• Your mortgage must be on a qualified home, meaning your main or second home (vacation homes count too).

Don’t assume that if you are married and file a joint tax return, you have to own your home together to claim the interest: for purposes of the deduction, the home can be owned by you, your spouse, or jointly. The deduction counts the same either way.

And don’t worry about keeping track of how much you’re paying in interest versus principal each month. At the end of the year, your lender should issue you a form 1098, which reports the amount of interest you've paid during the year.

Warning: as a first-time homeowner, since you pay more interest than principal in the first few years, that number can be fairly sobering.

2. You may be able to deduct points

Home owners often talk about paying points but don’t often know what the term means.

Points are essentially prepaid interest that you offer upfront at closing to improve the rate on your mortgage. The more points you pay, the better deal you get.

You can deduct points in the year you pay them if you meet certain criteria.

Included in the list (and it’s a long one): points must be paid on a loan secured by your main home, and the purchase of that loan must be to purchase or build your main home.

Points that you pay must also be within the range of what’s expected where you live; unusual transactions may cause you to lose the deduction.

3. For 2015, you can deduct PMI

Private mortgage insurance, or PMI, protects the bank in the event you default.

For first-time home buyers — especially if you can’t afford a large down payment — PMI may be required as a condition of a mortgage. For most years, PMI is not generally deductible.

However, for 2015, qualifying homeowners who itemize may claim a tax deduction for the cost of PMI for both their primary home as well as any vacation homes.

4. Real estate taxes are deductible

Real estate taxes are imposed by state or local governments on the value of your property.

Most banks or other mortgage lenders will factor the cost of your real estate taxes into your mortgage and put those amounts into an escrow account. You can’t deduct the amounts paid into the escrow, but you can deduct the amounts paid out of it to cover the taxes (you’ll see this amount on a form 1098 issued by your lender at the end of the year).

If you don’t escrow for real estate taxes, you’ll deduct what you pay out of pocket directly to the tax authority.

And don’t forget about those taxes you paid at settlement. If you reimburse the seller for taxes already paid for the year, you get to deduct those too.

Those amounts won’t show up on a form 1098; you’ll need to check your settlement sheet for those totals.

5. Your other tax deductions may matter more

To take advantage of these tax benefits (see numbers 1–4), you have to itemize your deductions on your tax return.

For most taxpayers, this is a huge shift: in many cases, you’re moving from a form 1040-EZ to a form 1040 to list expenses on Schedule A.

In addition to interest, points, and taxes, Schedule A is where you would report deductions for charitable donations, medical expenses, and non-reimbursed job expenses.

For itemizing deductions to make good financial sense, you generally want to have more total deductions than the standard deduction (for 2015, it’s $6,300 for individuals and $12,600 for married couples).

Most taxpayers don’t reach those numbers — unless they’re homeowners.

The home mortgage interest deduction, in particular, tends to tip most homeowners over the standard deduction amount, making those other deductions (like medical expenses) that might otherwise go unclaimed, more valuable.

6. You’ll get capital gains tax relief down the road

I know you just bought your home, but admit it: resale value is something you considered.

These days, more and more homeowners are buying homes as an investment. Unlike other investments for which you’re taxed on the full value of any gain, you can exclude some of the gain attributable to your home when you sell.

Under current law, you can avoid paying tax on up to $250,000 of gain ($500,000 for married filing jointly) so long as you have owned and lived in the property for two of the last five years (those years of owning and inhabiting don’t have to be consecutive).

Gain over that amount is taxed at capital gains rates, which are generally more favorable than ordinary income tax rates.

Kelly Phillips Erb "Trulia"

Brought to you by ERA TEAM Real Estate in Conway, AR

http://www.eraarkansas.com

ERA: 501-327-6731