Now that the year is coming to a close, many Americans are motivated to find new tax advantages for the remainder of 2016. Of course, one of the most appealing ways to reduce next year’s tax bill could be to buy a home before year’s end – and if that isn’t possible, it may be a good goal to shoot for next year. Here are some of the annual tax benefits of home ownership that potential home buyers can look forward to; but please keep in mind to always confirm everything with a tax professional.
Property Tax Deductions
With few (if any) exceptions, homeowners are able to deduct both state and local property taxes. But remember, these taxes are only deductible in the year they are actually paid to the government. For example: If your lender is holding in escrow money for taxes due in 2017, you will not be able to deduct that amount in 2016 and must wait until they are paid in 2017. Your lender is required to provide you with an annual statement that reflects the amount of mortgage interest and real estate taxes you paid during the previous tax year so you will know how much you can deduct.
Mortgage Interest Deductions
Homeowners can deduct the interest paid on the mortgage of a first home, and they can also deduct the interest on a second home. There are some limitations for mortgage interest deductions, though: The interest may only deductible on acquisition loans up to $1 million, and home equity loans up to $100,000 (ask your home loan professional and your tax professional for their respective insight on this). For homeowners who are married filing separately, these limits are typically split in half so that each spouse can claim half of the full deduction. Again, always consult a tax professional before claiming any deduction on your annual tax return, and always ask mortgage professional about acquisition loans vs. home equity loans and other applicable products.
Mortgage Point Deductions
When someone buys a home, they have the option of paying mortgage points in order to qualify for a lower mortgage interest rate. Mortgage points are equal to one percent of the total amount borrowed; so if you obtain a loan of $300,000, each point should cost $3,000. So, what’s the “point” on this “point”? Here it is: If you chose to purchase one or more mortgage points, you should be able to claim that expense as a tax deduction. And what if you’re in a scenario where the seller paid for your mortgage points, they are still deductible by the buyer (see the official IRS position on deducting mortgage points here).
Tax Benefits of Refinancing
Borrowers who refinance their homes can also deduct the interest and points related to the refinance loan; however, there are various conditions that must be adhered to. For example, the amount of the refinanced loan that exceeds the amount used to pay off the original mortgage and make improvements to the home is treated as home equity debt. This matters because the IRS only allows up to $100,000 of home equity debt to qualify for a deduction. There are other stipulations to the tax benefits of refinancing; ask your tax professional for details, as they are the only experts qualified to offer solid tax advice to homeowners.
As you can see, being a homeowner can afford one numerous tax benefits. If it’s too late for you to buy a home this year, don’t despair; 2017 will be here before you know it, and you should be able to enjoy those advantages soon enough. So, as a final disclaimer, while we are familiar with many tax situations and happy to share our experiences, we are not tax professionals and do not intend for any of this information to be construed as tax advice. If you have tax questions or doubts, we recommend you contact your qualified tax professional.
Copyright 2016. For more information, we welcome your calls or emails to Management 1 Tri-Cities Realty & Property Management at 800-205-M1TC or firstname.lastname@example.org.