Becoming a homeowner is hard work so when it is all said and done homeownership is something to really be proud of. Having a place to call home is a reward all in itself but there are even more perks for homeowners.
Some of your largest home-related expenses are often tax-deductible. In some cases, you may find it necessary to itemize your tax deductions instead of taking the standard deduction. It may be slightly more complex but a lower tax bill will be worth all the extra effort.
Mortgage Interest
This is usually the most significant tax break you’ll receive a big chunk of your monthly mortgage payment goes towards paying off interest for a while after your purchase. All of the interest you pay during the tax year will be deductible. If you happen to own properties with mortgages balances over a million dollars, the IRS will limit your deductible interest.
Points
When you buy a home, you have the ability to pay “points” to your mortgage lender in order to lower your interest rate. Typically, a point is 1% of the loan price, so you bought or build a new home that costs $250,000 and you paid your lender for one origination point, you should be able to deduct the $2,500 in closing costs paid, from your taxes the year of the home purchase. Let’s say your lender asks for 1.5%; this would mean you can deduct $3,750 from your taxes the year of home purchase. Generally, you can also deduct points on the year’s taxes if you took a home equity line of credit in order to make home improvements.
Real Estate Taxes
You will also have another big deduction to take on your tax return – property taxes. No matter where your home is located, you’ll pay some form of real estate tax. If you have an escrow account, it means you’ve been paying a portion of your total property tax bill for the year as part of your monthly mortgage payment. Don’t worry, you don’t have to keep up with the dollars and cents in order to take this deduction. Your lender will send you an annual statement, which will break down what you have paid in taxes and interest and what portion went to your escrow account to be used towards taxes. You can only deduct the amount your lender paid from your escrow towards taxes.
Energy Efficiency Credits
In addition to saving you money on energy costs, making improvements to the efficiency of your home may qualify you for a tax credit. Tax credits are actually somewhat superior to deductions since they are dollar-for-dollar savings no matter what tax bracket you fall into. Upgrading your home’s windows, roofing, appliances and more with energy efficient equipment will generally count toward a tax credit of this nature, but it’s important to check with the IRS to be sure, as things can change from year to year.
