September 10, 2020
5 MINUTE READ
It’s that time of year again – tax time. With taxes on the brain, everyone’s looking to save a buck. But the savings you’ve been looking for might be hiding right under your doormat.
We all know that owning a home can be a rewarding experience. And for those who are savvy enough to understand the tax deductions available for homeowners, it can be even more rewarding come tax time.
Take a look at some of the tax deductions that the IRS has created specifically for homeowners to reduce your personal income taxes. You can thank us later.
Mortgage interest, the portion of your mortgage payments that goes towards the interest cost of your home loan, is tax-deductible. For some homeowners, this deduction can provide a large tax break, which is especially true for those in the early years of a home loan when much of your mortgage payment is going towards interest.
Mortgage interest deductions are extended to second mortgages, as well. A refinance loan, home equity loan and/or home equity lines of credit are also tax-deductible, yet the IRS places restrictions on those who raise their mortgage debt beyond their property’s fair market value.
Keep in mind that the IRS imposes a $1 million loan size cap for this deduction. You must also itemize your deductions, your home must be owner occupied, you must be on the title of your property and the IRS must define your home as a home. They describe a home as any property that has sleeping, cooking and toilet facilities, such as a single-family home, condominium, cooperative, mobile home, boat or recreational vehicle.
Mortgage discount points, which homeowners often pay to get a better rate on their home loan, are considered prepaid interest by the IRS. Therefore, you can claim the entire amount of points paid as a deduction if the mortgage loan is secured by your primary home.
Keep in mind that you must deduct the points in full in the year you pay them. There are a few other stipulations for deducting your mortgage discount points. You can find a complete list via the IRS website.
As a homeowner, you’re accustomed to paying real estate taxes to local and state entities. These taxes can be deducted in the year in which they are paid via an itemized expense on Schedule A. If you’re currently paying property taxes through an escrow account, be careful to only deduct the amount actually paid to the taxing authority, which might be different than what you paid into the escrow account.
Keep in mind that your tax bill may also include fixed charges such as special assessments and/or bond indebtedness, which are not tax deductible. You can prepay the next installment of your property tax bill before the end of the year to increase your deductions for the current year, but you’ll want to speak with a tax professional to ensure this strategy is beneficial for your specific situation.
Be careful here. The IRS draws a fine line between money spent on home improvements and home repairs. Only home improvements, those that materially add value to your home, prolong your home’s useful life or adapt your home to new uses, can be deducted. Adding a new room, upgrading your existing roof or adding a home security system are a few examples of home improvements.
It is important to note that unlike many other homeowner tax deductions, you cannot claim home improvement deductions in the year you paid them. They only come into play when you sell your home. They work to reduce your overall gain at the time of the sale.
If you’ve refinanced your home this year, you should be aware of how that impacts your tax deductions.
Typically, you can only deduct qualified points paid on a mortgage over the term of the loan, unless the property is a rental property. When refinancing, the fees that can be deducted generally depend on whether the property is your principal residence or rental home, how the loan proceeds were used, and whether you paid qualified points or not.
If the mortgage refinance was for your main or second home, you can deduct qualifying points over the life of the loan. However, other fees such as bank fees, attorney fees, registration fees and other applicable closing costs are not deductible.
On the other hand, if you refinanced your rental property, you’re allowed to deduct points and other fees such as underwriting, attorney and title search fees.
Don’t Leave Money on the Table During Tax Time
Understanding the full breadth of tax deductions available to you as a homeowner can be overwhelming; laws change all the time. Always consult with a tax professional for an in-depth understanding of the tax deductions that will best benefit you.
Our team at Reali Loans is always available for consultation regarding your mortgage refinancing needs, and looks forward to helping you take the traditional hassles out of the refinance process. You can count on us for full transparency, quicker closing times, a smoother process, and great savings! Get your own personalized quote online in just minutes. We look forward to hearing from you soon!