September 6th, 2017 7:13 AM by Jackie A. Graves, President
Hours after we closed on our first house, my
husband and I sat in our empty new living room and stared at the walls. He was
the first to speak, saying simply, “I thought it was painted.”
We learned a lot about that old house over
the next 15 years. While we knew to expect some of the work, other tasks, such
as needing to paint the walls,
we figured out as we went along. One of the changes we didn’t anticipate was
needing to make some adjustments to our tax forms.
The forms you fill out when you buy your
house are just the beginning. We quickly understood that first-time homeowners
have years of mortgage and insurance paperwork to look forward to. Then, of
course, there are the taxes. To help you sort through that pile of paperwork
and ensure you’re saving as much money as possible we did some research into
tax benefits that can come from buying.
The home mortgage interest deduction is
probably the best-known tax benefit for homeowners. This deduction allows you
to deduct all the interest you pay toward your home mortgage with a few
exceptions, including these big ones:
mortgage can’t be more than $1 million.
mortgage must be secured by your home (unsecured loans don’t count).
mortgage must be on a qualified home, meaning your main or second home
(vacation homes count too).
Don’t assume that if you are
married and file a joint tax return, you have to own your
home together to claim the interest. For purposes of the deduction, the home
can be owned by you, your spouse, or jointly. The deduction counts the same either
And don’t worry about keeping track of how
much you’re paying in interest versus principal each month. At the end of the
year, your lender should issue you a form 1098, which reports the amount of interest
you’ve paid during the year.
Warning: Since, as a
first-time homeowner, you pay more interest than principal in the first few
years. That number can be fairly sobering.
Points are essentially prepaid interest that
you offer upfront at closing to improve the rate on your mortgage. The more
points you pay, the better deal you get.
You can deduct points in the year you pay
them if you meet certain criteria. Included in the list (and it’s a long one):
Points must be paid on a loan secured by your main home, and that loan must be
to purchase or build your main home.
Pro tip: Points that you pay
must also be within the range of what’s expected where you live — unusual
transactions may cause you to lose the deduction.
insurance, or PMI, protects the bank in the event you default.
PMI may be required as a condition of a mortgage for first-time homebuyers,
especially if they can’t afford a large down payment.
For most years, PMI is not generally
deductible, but the specific rules around it change annually. In 2016, if you
made less than $109, 000 a year as a household, you could claim a tax deduction
for the cost of PMI for both their primary home and any vacation homes. Check
to see if the PMI deduction is a possibility as you are working on your taxes.
estate taxes are deductible.
Real estate taxes are imposed by state or
local governments on the value of your property. Most banks or other mortgage
lenders will factor the cost of your real estate taxes into your
mortgage and put those amounts into an escrow account.
You can’t deduct the amounts paid into the
escrow, but you can deduct the amounts paid out of it to cover the taxes
(you’ll see this amount on a form 1098 issued by your lender at the end of the
If you don’t escrow for real estate taxes,
you’ll deduct what you pay out of pocket directly to the tax authority.
And don’t forget about those taxes you paid
at settlement. If you reimburse the seller for taxes already paid for the year,
you get to deduct those too.
Those amounts won’t show up on a form 1098;
you’ll need to check your settlement sheet for the totals.
To take advantage of these tax benefits, you
have to itemize your deductions on your tax return.
For most taxpayers, this is a huge shift: in
many cases, you’re moving from a form 1040-EZ to a form 1040 to list expenses
on Schedule A.
In addition to interest, points, and taxes,
Schedule A is where you would report deductions for charitable donations,
medical expenses, and unreimbursed job expenses.
For itemizing deductions to make good
financial sense, you generally want to have more total deductions than the
standard deduction (for 2015, it’s $6,300 for individuals and $12,600 for
married couples). Most taxpayers don’t reach those numbers — unless they’re
The home mortgage interest deduction, in
particular, tends to tip most homeowners over the standard deduction amount,
making those other deductions (such as medical expenses) that might otherwise
go unclaimed more valuable.
I know you just bought your
home, but admit it: Resale value is something you considered when you chose
your home. And different from other investments for which you’re taxed on the
full value of any gain, you can exclude some of the gain attributable to
your home when you sell.
Under current law, you can avoid paying tax
on up to $250,000 of gain ($500,000 for married filing jointly) so long as you
have owned and lived in the property for two of the last five years (those
years of owning and inhabiting don’t have to be consecutive).
Gain over that amount is taxed at capital
gains rates, which are generally more favorable than ordinary income tax rates.
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