The Tax Benefits of Homeownership

    One aspect of the great “American Dream” has always been to own a home.

    Besides the obvious benefits like having complete ownership over your own space and creative control over the layout of the home, there are a few other key perks associated with homeownership.

    The following is a list of the itemized tax deductions available to the average homeowner: 

    Taxes: 

    Real property Taxes, both state and local, can be deducted, with one exception: Tax filers can deduct on Schedule A any combination of state and local property taxes and income or sales taxes, but only up to a total of $10,000. Interestingly, married couples who file their own separate tax return can only deduct up to $5000.

    However, it should be noted that real estate taxes are only deductible in the year they are actually paid to the government. Thus, if in the year 2018, your lender held in escrow money for taxes due in 2019, you cannot take a deduction for these taxes when you file your 2018 tax return. Mortgage lenders are required to send an annual statement to borrowers by the end of January of each year, reflecting the amount of mortgage interest and real estate taxes the homeowner paid during the previous year.

    Mortgage Interest:

    Interest on mortgage loans on a first or second home is fully deductible, with the following limitations: acquisition loans up to $1 million and home equity loans up to $100,000. If you are married but file separately, these limits are split in half. But note that for new loans taken out after December 14, 2017, the limit on deductible mortgage debt is reduced to $750,000. Loans in existence prior to that date are grandfathered in.

    To qualify for an acquisition loan, you must buy, construct, or substantially improve your home. If you refinance for more than the outstanding debt, the excess amount does not qualify as an acquisition loan—unless you use all of the excess to improve your home. However, any other excess may qualify as a home equity loan.

    Points:

    Because mortgage rates are still considerably low, not too many borrowers are paying points. When you obtain a mortgage loan, in order to get a lower rate mortgage, you would pay one or more points. Referred to as “loan origination fees,” “premium charges,” or “discounts,” these are still points: Each point is 1% of the amount borrowed, so for example, if you obtain a loan of $170,000, each point will cost you $1,700 and the interest rate on your loan will be lowered.

    The IRS has also ruled that even if points are paid by sellers, they are still deductible by the homebuyer. Points paid to a lender when you refinance your current mortgage are not fully deductible in the year they are paid; you have to allocate the amount over the life of the loan. For example, let’s say you paid $1,700 in points for a 30-year loan. Each year you are permitted to deduct only $56.66 ($1,700 divided by 30); however, when you pay off this new loan, any remaining portion of the points you have not deducted are then deductible in full.

    Of course, if you have any questions about these tax benefits, discuss them with your financial and legal advisors.

    For any other questions regarding buying or selling property, you are always encouraged to reach out to me.

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