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Although there are several added expenses involved in purchasing a home, some of these expenses are tax deductible on your return. Expenses such as Mortgage Interest and Private Mortgage Insurance help reduce your taxable income on your return.
We’ll discuss these different types of expenses and how to take advantage of it.
1. Mortgage Interest
Mortgage Interest on a maximum of $1,000,000 of debt is tax deductible if you itemize. This Mortgage Interest can be secured by either a 1st or 2nd home. Additionally, if you file your tax return as married filing separately, the Mortgage Interest is split in half for each return.
2. Private Mortgage Insurance (PMI)
Most lenders will require the buyer to pay PMI if they are not able to put down a certain amount of money up front, in order to protect the lenders against default. Typically, PMI is required on loans where the buyer is not able to put at least 20% of the cost down. However, it differs by lender, and there are a few that only require 3% to 5% as a down payment.
A new law passed in early 2007 has allowed home buyers to deduct the PMI expense on their tax return as part of their Mortgage Interest expense. The good news for taxpayers is that there is no limit to the amount of PMI you can deduct as well as no income limit that reduces the amount of the deduction.
Points are a type of fee charged by mortgage brokers. Points paid on the purchase of a home are fully deductible for the year of purchase.
Additionally, any points paid on the refinancing of a home are deducted over the life of the loan. However, once you refinance, any outstanding points from the refinanced loan are deductible in the year of refinancing.
4. Home Improvement Loan Interest
Mortgage Interest on loans taken out to complete major renovations on your home is deductible. Take note though, interest is only deductible if it is for “capital repairs” — ordinary repairs won’t cut it.
5. Property taxes
Finally, property taxes paid each year are fully deductible on your tax return. However, be aware that money in an escrow account can only be deducted once it is paid.
Very few people use the words fun and taxes together… and don’t worry, I’m not one of them. I hope to make taxes easier to understand and less of a hassle. I am a CPA with a Master’s in Accounting, and I’ll do my best to help explain many of the tax options available today.