4 Tax Breaks of Homeownership
There are two things you can count on when you become a homeowner: You get more tax breaks, and your taxes get more complicated. Whether you've purchased a single-family home, town house, or condominium, there are tax breaks available to you. It's time to get familiar with the Form 1040 and Schedule A because that's where you will have to provide all the details about your new tax-deductible expenses.
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To take advantage of these tax breaks, you have to itemize your deductions. If this is the best choice for you, here some of the expenses you can deduct.
Mortgage interest deduction. Owning a home allows you to deduct the interest you pay for your mortgage. This is usually the biggest tax break for most people because a significant amount of your house payment goes toward interest during the early years of a mortgage. You can deduct all the interest you pay unless your loan is for more than $1 million. This includes any interest you pay on a loan to buy your home, and with some limitations, the interest on a home equity line of credit or home equity loan.
There are two conditions you must meet in order to get this deduction. You must file Form 1040 and itemize deductions on Schedule A (Form 1040). The mortgage is a secured debt on a qualified home in which you have an ownership interest.
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Points deduction. When you finance a home, you may pay what are called "points." Points lower the interest rate on your mortgage by effectively prepaying a portion of the interest at closing. Points are paid by the borrower to the lender as part of the loan deal and they are a percentage of the loan. Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points.
Points are deductible as interest, but you generally can't deduct the full amount in the year they were paid unless you meet certain requirements. If you aren't eligible to deduct your points the first year, you can deduct them over the life of the mortgage. To determine if you are eligible, reference the exact guidelines provided by the IRS.
Deduction of PMI premiums on certain mortgages. If you make a down payment of less than 20 percent, you are required to carry private mortgage insurance, or PMI. This type of insurance is paid for by the buyer, but protects the lender in the event the borrower stops paying on the loan. PMI premiums can be deducted if the mortgage was issued after 2006. This deduction is effective for premiums paid through 2011. There are no limits on the amount of PMI premiums you can deduct; however, your income may reduce the deduction amount.
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Tax savings on the gain when you sell. This one almost seems too good to be true. When you sell your home, the amount of your gain from the sale is tax-free if you meet the criteria. The rules are broken down into two categories: married and single. If you are married, you can earn up to $500,00 on the sale and you won't have to pay tax on the earnings. If you are single, you can earn up to $250,000 without paying any federal tax. There's only one catch: You have to own and occupy your home for at least two of the past five years.
DR is the founder of the popular personal finance blog The Dough Roller, and the credit card review site Credit Card Offers IQ.
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