Taking Advantage of the Home Buying Tax Benefits
See how big a tax break you could get if you buy a home. Get information on tax deductions for closing costs, interest charges & profits from a sale.
Many Americans dread tax season, but home owners have something to smile about. That's because there are numerous tax breaks from the time you buy your home to the time you sell it.
Recoup Purchase Fees During Tax Season
If you bought a home this year you may have had to pay closing costs. The good news is you can get some of that back in your taxes, even if the seller helped pay them. Use the HUD-1 Settlement Statement to figure out how much you can deduct on your taxes. Another good resource to use is IRS Publication 530 which discusses deducting loan points.
Daily Interest Charges
Line 901 of the HUD-1 Settlement Statement - Daily interest charges from / to. When a closing occurs after the first of the month a daily interest charge is applied to everyday between the closing date and the end of the month or the date of your first payment. For example, if your daily interest charge is $20 and you closed on your home Oct. 15th the total would be $340.
Origination Charges
Line 801 of the HUD-1 Settlement Statement - Your origination charge. Regardless of whether or not you paid the origination fee to establish the loan you'll still be able to deduct the fee from your taxes. This is because the origination charges are considered to be pre-paid interest on a loan. There are requirements that must be met, in particular that the origination fee cannot include other fees that are usually separate such as appraisal fees, title fees and property taxes.
Loan Discount Points
Line 802 of the HUD-1Settlement Statement - Your credit or charge (points) for the specific interest rate chosen. The full amount of the loan discount points can be deducted in the tax year that you bought your home, whether they were paid by you or the seller. There are some requirements, such as the home purchased must be your main residence, but many buyers will be able to deduct their loan discount points.
See a Big Tax Break Every Year of Mortgage Interest & Insurance
Mortgage interest deductions are arguably the most well-known and widely used of the homeownership tax benefits. Homeowners can deduct a portion of the interest they are charged on their home loans and home equity loans each year. This is especially beneficial in the earlier years of the loan when the monthly payment is mostly interest.
Some home owners use this to their advantage by taking out a home equity loan to pay off other debts that have interest charges which can't be deducted, such as credit card debt or car loan. However, owners have to keep in mind their home is the collateral on a home equity loan and if it isn't paid the home can be foreclosed on.
Home owners that pay private mortgage insurance can also deduct that total from their taxes. As long as the mortgage insurance is being paid on residential real estate and the mortgage contract was established after December 31, 2006 you should be able to deduct the PMI you pay.
By the beginning of February your lender should send you a 1098 form that lists the total mortgage interest and mortgage insurance they have reported as being paid. Check this against your monthly payments to ensure the totals are correct.
Additional Real Estate Tax Breaks
In addition to the deductions mentioned above, there are other tax breaks that home owners can use to lower their taxes or increase their tax return. These include:
- Home Energy Credits
- Homebuyer Credits
- Home Office Deductions
- Sales Tax Deductions on Home Improvement Purchases
Tax Breaks on Home Sales Make them a Sound Investment
Unlike profits made on other investments, the sale of your home could be completely free of federal taxes. If you've lived in your home at least two of the last five years and it has served as your principle residence then money you earn on the sale of your home will not be subject to federal income taxes.
Married couples can earn up to $500,000 on the sale of their home without federal tax fees and singles can earn up to $250,000 before being charged any federal taxes. You can do this every two years, there are no limits to the number of times you can sell.
If you're considering whether or not you can afford to buy a home you'll need to factor in the tax benefits above. They can make a significant difference to the upfront cost, annual cost and overall return of your investment.