With the recent discussion of the first-time homebuyer tax credit, more and more homeowners are exploring the tax benefits of home ownership.
There are many different ways you can gain tax benefits from a home purchase or a mortgage refinancing. This article will take you through five popular tax reduction opportunities associated with home ownership.
First-Time Homebuyer Tax Credit - This is one of the most powerful tax incentives to come along for home buyers. Better than a deduction, which only reduces the amount of income you are taxed on, a tax credit provides a dollar-for-dollar offset of your Federal income tax liability. For example, if you owed $10,000 in taxes, the $8,000 tax credit would reduce your tax liability to $2,000. Furthermore, this is a refundable tax credit, meaning that even if your tax liability doesn't amount to $8,000, you get the balance as a check. To qualify for this tax credit, you must not have owned a primary residence in the past three years, and your income cannot exceed $125,000 as an individual filer, or $225,000 for married taxpayers. The credit is limited to 10% of the purchase price with a maximum of $8,000. A new provision in the bill was the introduction of a $6,500 tax credit for existing homeowners to purchase a new home. To qualify for this credit, you must have lived in your current home for five consecutive years out of the past seven. More details on the credit are available at www.federalhousingtaxcredit.com.
Home Mortgage Interest Deduction - Taxpayers are allowed to deduct the interest paid on their mortgage each year. Your lender will provide you annually with an IRS Form 1098 indicating the amount of mortgage interest paid. To utilize this deduction, you need to itemize your taxes. You enter the interest paid on Schedule A of your tax return. The amount of your deduction is limited to $1 million worth of mortgages (i.e. first and second), and your mortgage must have been used to purchase, build, or improve a home. Lastly, you can also deduct any late fees or prepayment penalties on your mortgage. If you believe your income will be lower this year than next, you might elect to pay your January mortgage payment on the 1st of the year to roll that interest payment into 2010 when it might be more valuable.
Home Equity Loan Interest Deduction - Interest paid on a home equity loan is also deductible provided it does not exceed $100,000 in a year. In addition, your deduction may be limited if your combined first and second mortgage loans exceed the property value.
Deducting Points on a Mortgage - The "points" you pay on a mortgage loan used to purchase, build, or improve your primary residence are deductible in the year you purchased the home. Points paid by the seller are also deductible. There are a few caveats, including the fact that your points must be disclosed on your closing statement and your deductible points cannot exceed the total paid in down payment and closing costs.
Deduction for Real Estate Taxes - If you itemize, you are able to deduct your annual property taxes. These might represent a combination of property, school, and utility district taxes.
As you can see, there are many ways a homeowner can benefit from the Federal tax code. Note that most of these deductions are only available to taxpayers who itemize their taxes. In addition, your tax credits and deductions begin to phase out at higher income levels.
Combining these benefits makes home ownership even more attractive than it already is. As with any tax related items, you should check with your tax advisor to find out how to maximize homeownership tax reduction strategies.
Mike Lesmeister, CRMS, is a licensed mortgage broker and partner with Home Loan Specialists, Inc., a Houston-area mortgage lender specializing in low rate mortgage refinancing in The Woodlands, Spring, Tomball, Conroe, and Houston, Texas.
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