It’s tax season and your home offers some significant tax savings. Speak with your accountant about the details of home ownership tax benefits, but here are a few things to keep in mind as you prepare your taxes this year.
- Mortgage deduction: The tax code allows homeowners to deduct the mortgage interest from their tax obligations. For many people this is a huge deduction, since interest payments can be the largest component of your mortgage payment in the early years of owning a home.
- Some closing cost deductions: The first year you buy your home, you are able to claim the points (also called origination fees) on your loan, no matter whether they are paid by you or the seller.
- Property tax is deductible: Real estate property taxes paid on your primary residence and a vacation home are fully deductible for income tax purposes.
- Tax Deductions on Home Equity Lines: In addition to your mortgage interest, you can deduct the interest you pay on a home equity loan (or line of credit).
The tax deductions you’re eligible to take for mortgage interest* and property taxes greatly increase the financial benefits of home ownership. Let’s work through a hypothetical situation to see how it works.
If we assume the following:
$9,877 Mortgage interest paid (a loan of $150,000 for 30 years, at 7 percent, using year-five interest)
+$2,700 Property taxes (at 1.5 percent on $180,000 assessed value)
$12,577 Total deduction
Then, multiply your total deduction by your tax rate.**
For example, at a 28 percent tax rate: $12,577 x 0.28 = $3,521.56
$3,521.56 = Amount by which you have lowered your federal income tax
*Mortgage interest may not be deductible on loans over $1.1 million. In addition, deductions are decreased when total income reaches a certain level.
**The rate at which you’re taxed is determined by your tax bracket, which in turn is determined by how much you earned in a given year along with your filing status (single, married filing jointly, married filing separately, or head of household). IRS Publication 501 will help you determine your rate.
Sources: Forbes | National Association fo REALTORS®