The best time to own a home is tax time. There are a slew of tax breaks for homeowners and it’s important to know what you can and cannot deduct. Please be sure to consult with your tax advisor or
The best time to own a home is tax time. There are a slew of tax breaks for homeowners and it’s important to know what you can and cannot deduct. Please be sure to consult with your tax advisor or accountant.
To deduct expenses of owning a home, you must file Form 1040 and itemize your deductions on Schedule A. If you took out a mortgage (loan) to finance the purchase of your home, you probably have to make monthly house payments. Your house payment may include several costs of owning a home. The costs you can deduct are real estate taxes, interest that qualifies as home mortgage interest, and mortgage insurance premiums. Some nondeductible expenses that may be included in your house payment include homeowner’s insurance premiums and the amount applied to reduce the principal of the mortgage.
Most state and local governments charge an annual tax on the value of real property. This is called a real estate tax. You can deduct real estate taxes imposed on you. You must have paid them either at settlement or closing or to a taxing authority (either directly or through an escrow account) during the year.
Most homebuyers take out a mortgage (loan) to buy their home. They then make monthly payments to either the mortgage holder or someone collecting the payments for the mortgage holder. Usually, you can deduct the entire part of your payment that is for mortgage interest, if you itemize your deductions on Schedule A (Form 1040). However, your deduction may be limited if your total mortgage balance is more than $1 million ($500,000 if married filing separately), or you took out a mortgage for reasons other than to buy, build, or improve your home.
Points can also be deductible. The term “points” can be used to describe a variety of loan-associated charges that may be deductible. The term “points” is also used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. Points may be called loan origination fees, maximum loan charges, loan discount, or discount points.
There are miscellaneous amounts charged by the lender or title company for specific services connected to the loan that are not considered “interest” and therefore not deductible, some examples are appraisal fees, notary fees, and preparation costs for the mortgage note or deed of trust.
At the closing of your purchase, you should have received a Settlement Statement, sometimes called a HUD1 that is a detailed summary of your transaction. This can be a valuable resource for you and your tax advisor in determining the deductibility of charges and payments related to your purchase.
If you are a first-time homebuyer, you may be able to claim a one-time tax credit of up to $7,500 ($3,750 if married filing separately), or 10% of the purchase price of your home (whichever is smaller).
A qualified home is your main home or your second home. A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities. You can have only one main home at any one time. This is the home where you ordinarily live most of the time. The IRS or your tax advisor can assist you in determining your qualified home.
For more information on these programs, visit www.irs.gov or call the IRS with your tax questions at 1-800-829-1040.
• The Kauai Board of Realtors is a nonprofit organization comprised of 700 Realtors and associates from the bank, mortgage and escrow industry. The board answers reader questions twice a month in the Business section. For more information, visit www.kauaiboard.com
