As we enter tax season, it’s a great time to review the tax advantages associated with owning your own home. Of course, consulting your tax advisor is always the key to ensuring that you receive the most updated, accurate information and that your write-offs are right-on, but here is a brief overview of what are generally considered some of the typical deductions that might help maximize the returns on your investment, as well as some new developments that took effect in 2007.
1. Mortgage Interest Payments. A major tax advantage for homeowners, mortgage interest is usually deductible on a primary residence, as well as on a second home meeting certain requirements. Every January your home loan lender should provide you with a Form 1098, which outlines the amount of interest you paid for the year.“For example, if a homeowner’s monthly mortgage payment is approximately $2,000, he or she may pay only a few hundred dollars to the principal per month, particularly if the homeowner has only been paying on the mortgage for a few years,” says Charlie Rogers, managing director of Countrywide. Of course, the balance of the payment is applied toward the interest. In just one year, that can add up to thousands of dollars in deductions.
2. Mortgage Insurance Payments. Your 2007 mortgage insurance payments may be tax-deductible, since Congress extended the mortgage insurance deduction for an additional three years. The mortgage insurance deduction will help certain low- and moderate-income homeowners, particularly first-time home buyers. While there are certain restrictions, the deduction could save taxpayers who itemize as much as $300 to $350 in federal taxes.
3. Points. Also known as loan discount or mortgage origination fees, points are often paid to the lender upon purchasing a home. This cost-even when paid on your behalf by the seller-may be tax deductible as a prepayment of interest if certain basic requirements are met. “If certain requirements are met, points can be deducted in the year that they are paid; however, in some situations, they are deducted over the life of the loan,” says Rogers. “By having your tax advisor review your closing statement, you can potentially capitalize on tax benefits available from paying points on your new mortgage.”
4. Property Taxes. These annual taxes are based on the assessed value of your property and may be a considerable deduction each year. If you use an impound account through your lender, these costs are often shown on your mortgage interest statement. The closing statement on your new loan may also include real estate taxes, which could be deductible as well.
5. Home Improvements. It is important to keep receipts for your home improvement expenditures. Although these costs cannot be deducted while you own your home, they could help lower your taxes when you sell it. In some states, the sales tax paid on building materials may be considered as a deduction.
6. Home Equity. Leveraging the equity in your home to set up a home equity loan could mean tax benefits that would not be available through other credit sources, such as credit cards or personal loans, because the interest paid on a home equity loan is often tax deductible.
The bottom line. “Owning your own home yields a host of advantages-everything from a sense of pride and freedom, to long-term investment opportunity,” says Rogers. “And at tax time every year, it can really bring home the savings.”