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Oct 2016

The Tax Benefits of Homeownership

Tax season. For some, the two words inspire a little anxiety. For others, the words inspire hope of a tax refund. If you’ve just purchased your first home, the words will probably inspire a little of both. You may have heard that some things related to your home can be claimed on your income taxes to get you more of a refund, but, what exactly? How?

If you want to take advantage of tax write offs (deductions), you will need to file a 1040 tax form, with a Schedule A, depending on your other tax situations for the year.

A tax deduction is a reduction in your income as result of expenses. Because it lowers your income, it may reduce the amount of tax you’re going to be required to pay. That usually results in a refund.

Deductions, itemizations, and write offs are all terms meaning the same thing — a reduction in income due to expenses — and are often used interchangeably.

If you aren’t well-versed on tax forms like most of us, the 1040 is the most complicated IRS income tax form. The form also asks you to complete supplemental information called schedules. There are schedules for self-employment, medical expenses, income gains and losses from investments, medical expenses, interest paid, and charitable donations. Each schedule is identified by an alphabetical letter. Schedule A covers deductions such as property taxes and mortgage interest paid.

If this is your first time buying a house and the first time filing taxes after the purchase, you may want to seek the help of a tax professional to make sure you take advantage of all of the home-related tax deductions and itemizations.

If other things also happened like getting married, having a baby, and/or relocating for work, there may even be additional deductions available for you.

What kind of home-related perks can you take advantage of by itemizing?

Mortgage interest

Each month you make your payment, part of that consists of interest. All of the interest you pay is tax deductible if your loan is less than $1 million. If you own multi-million dollar properties, your interest deductions are limited by the IRS.

If you refinanced or got a home equity line of credit, those debts may be partially deductible too.

If you bought a second home, that interest is also deductible. If you’re an investor who rents out a property for part of the year and lives in the house part of the year, you may be able to deduct that interest as well. If you don’t stay in the home for vacation purposes at least 10% of the number of days you rent it or at least 14 days a year, the IRS may not see it as a rental property and not allow you to deduct any of the interest.

Residential rental properties that are occupied by tenants all year do not count for tax write-offs.


If you paid to have your interest rate reduced, [you most likely had points on your Closing Disclosures. You have the ability to deduct those points, but it gets a little tricky.

If you purchased a new home or built a new home, you may be able to deduct the points in the year you paid them if the home is your primary residence and the amount you paid was deemed a reasonable amount.

If you refinanced, you’re also eligible to deduct points, but it requires you to do some math. If you paid points during a refinance, they have to be deducted over the life of the loan.

If you paid $3,000 in points for a 30-year mortgage, then you would have to calculate what the monthly portion of those points are. $3,000 divided by 360 months (a 30-year mortgage) yields a monthly portion of $8.33. Then, you have to calculate the number of months you paid mortgage payments in the tax year. If you made 12 payments, then you could deduct $99.96 in points. Then, each year, you’d deduct the same amount.

If you have a home equity line of credit and use the line of credit to make home improvements, you can count the points in the year you bought them. However, if you used the home equity for something else, then you have to apply the same logic as if you had refinanced and spread the deductions out over the term of your loan.

Lastly, if you purchased any other sort of home (second home or vacation home), you must deduct those points over the life of the loan.

Property taxes

No matter where you live, you’re going to be paying some sort of property tax for your home. If your mortgage servicer has been paying your taxes for you, you’ve most likely been paying 1/12th of the total tax bill as part of your monthly mortgage payment into an escrow account. You probably even paid some pro-rated taxes at closing too.

The good news – your payment of taxes is completely tax deductible if you itemize them on Schedule A. During the first year that you purchase a home, the taxes paid on the property will be split between buyer and the seller. The buyer can only write off what they have paid for the home during that calendar year.

Is your head spinning? You don’t have to stress about finding the above information when it comes to taxes, interest, and points. Your lender will send you a 1098 form at the beginning of the year with these items on it to make your tax filing a little smoother. The 1098 is an IRS tax form that specifically relates to your home. It breaks down your taxes, interest, and points paid.

Is homeowner's insurance tax deductible? Sadly, the IRS does not consider any premiums paid for homeowners insurance as tax deductible.

How do mortgage credit certificates impact taxes?

In some states like Virginia and North Carolina, first-time homebuyers may be eligible for the Mortgage Credit Certificate (MCC), which helps make getting a mortgage more affordable. They’re not a tax deduction. They’re a credit against federal income tax liability which is equal to a certain percentage of annual mortgage interest paid. They save you money now because the credit allows you to change your withholding information on your W-4, giving you access to more income now.

Then, later, you can still claim the remaining interest on your federal income tax return. There are income and purchase amount requirements for the MCC, so talk to your mortgage banker about your eligibility.

What about energy efficiency? Any credits for that?

You may be eligible for tax credits for improving your home with energy efficient features and appliances. Many credits are only good for a short period of time. Check with the IRS to see which ones are expiring this year. Some may be extended.

Until now, you may have thought of the word “taxes” as a not-so-nice word, but now that you know that homeownership has tax perks, the only question that remains is – what are you going to do with your refund?

If you have any questions about homeownership and how you can take advantage of tax benefits, please don’t hesitate to call an Atlantic Bay mortgage banker.