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Chris Sorensen's Blog

By Chris Sorensen | Real Estate Pro in California

Home Ownership, The LAST Great Tax Break For The Average American

The following information is not to be construed as legal or tax advice. It is only the opinion of the author. All readers should consult with their own tax professional to determine their own individual tax benefits or burdens with respect to homeownership.

Now, with that disclaimer out of the way…

With April 15 right around the corner and many predicting this incredible ride of never before seen interests’ rates going away in the not too distant future, it is appropriate to recall the most common tax deduction homeowners have and motivate some of you fence sitters to take advantage of this market if you can.

The U.S. tax code is designed to offer incentives to homeowners.

Whether a home is financed via a mortgage, or paid-in-full with cash, there are a multitude of tax-savings opportunities associated with owning a home.

Tax Deduction : Mortgage Interest Paid

Mortgage interest paid to a lender is tax-deductible and, for some homeowners, can provide a large tax break — especially in the early years of a home loan. This is because a standard mortgage amortization schedule is front-loaded with mortgage interest.

At today’s mortgage rates, annual interest payments on a 30-year loan term exceed annual principal payments until loan’s 10th year.
Mortgage interest tax deductions are extended to second mortgages, too. Interest paid on refinances, home equity loans (HELOAN) and home equity lines of credit (HELOC) is tax-deductible as well. However, restrictions apply on homeowners who raise their mortgage debt beyond their property’s fair market value.

In addition, the Internal Revenue Service (IRS) imposes a $1 million loan size cap. Loans for more than one million dollars are exempt from this tax deduction.

Tax Deduction : Discount Points

Discount points paid in connection with a home purchase or a refinance are also tax-deductible. By way of definition, a discount point is a one-time, at-closing fee which gets a borrower access to mortgage rates below current “market rates”.

For example, if the market mortgage rate is 4 percent, paying 1 discount point may get you access to a mortgage rate of 3.75%. The IRS treats discount points as “prepaid mortgage interest” which, in turn, makes them tax-deductible in most cases.

When you pay discount points in conjunction with a purchase, the points may be deducted in full in the year in which they were paid. With respect to refinances, discount points are typically amortized over the life of the loan such that 1 point is deducted at 1/30 of its value per tax-calendar year.

There are additional qualifications to meet in order to claim discount points. Your accountant can help.

Other Deductions : Property Taxes, Renovations, Home Office
Real Estate Taxes

Homeowners typically pay real estate taxes to local and state entities. These property taxes may be deducted as an expense and income in the year in which they are paid. If your mortgage lender currently escrows for your taxes and insurance, you can expect an annual statement to file along with your federal tax returns.

Home Improvements

For tax-paying homeowners, certain types of home improvement projects may be tax-deductible, too — specifically ones made for medical reasons. For example, if home renovations are made to accommodate a chronically ill or disabled person, and do not add to the overall value of a home, project costs are entirely tax deductible. Repairs made for aesthetic purposes are not eligible.

Home Offices

Homeowners who work from their residence can typically deduct expenses used for maintaining qualified home offices. These deductions include everything from renovations to the cost of utilities. However, there are several conditions for claiming home office space on your tax returns, and the rules can be tricky. Before claiming a home office, speak with an accountant to understand the benefits and potential liability.

Homeowners : Budget For Your Tax Breaks

Homeowner tax deductions reduce the annual costs of homeownership, but they’re far from a qualified reason to buy an actual home. Tax law can (and does) change frequently so consider whatever deductions to which you’re entitled a bonus.

Build your housing budget with the help of a tax preparer, if you’d like. Get a feel for how much home you can afford — before and after accounting for tax breaks. And, as you build your budget, make sure to use legitimate mortgage rates. Source: Dan Green

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