Purchasing a home is a life-changing event. You’re suddenly responsible for a number of things you may not have been responsible for if you rented in the past, including mowing the lawn, shoveling the driveway or repairing a leaky roof. There’s a whole other aspect to owning a house apart from a few additional chores, though. Your home also affects your taxes.
If you’re already a homeowner, this probably isn’t news to you. However, if you’re in the market for your first home, I’ve got some valuable information for you. Below you can find information about what you can and can’t deduct, along with other tips for tax season!
What Can Be Deducted
A new mortgage means a little more work for you when it comes time to file your taxes. However, the extra work is worth it in the end. Perhaps the most important tax deduction you need to be aware of is your mortgage interest. At year-end, check out Form 1098 from your lender to see how much mortgage interest you’ve paid.
Simply put, mortgage points are prepaid interest. You can purchase points to lower your interest rate when you get your loan. By purchasing points, you can save money in the long run if you stay in the home for a certain period of time, depending on the amount of points you purchase.
For example, if you have a $200,000 mortgage and buy two points, you’ll owe $4,000 for those points at closing. (Each point is 1% of the value of your mortgage.) If buying the points lowers your payment $250 a month, you’ll have to stay in your home for at least 16 months to break even. After that time passes, you’ll start putting money back in your pocket.
Are you eligible to deduct money you spent on mortgage points from your taxes? Each situation is different, but it’s worth looking into!
Owning a home also gives you the responsibility of paying property taxes. In most cases, your taxes are rolled into your monthly mortgage payment, and your mortgage company pays your taxes from your escrow account when they’re due.
If you’re a first-time home buyer, you’ll need to know the total real estate taxes for the real property tax year and the number of days in the property tax year that you owned the property.
Private Mortgage Insurance (PMI)
Thanks to a bill the Senate approved in late December 2014, homeowners can deduct the cost of mortgage insurance premiums on their 2014 tax forms. The tax break covers PMI premiums and premiums paid on FHA, VA and Rural Housing Service guaranteed loans, according to an article on National Mortgage News.
What Can’t Be Deducted
- Property hazard insurance premiums
- Homeowners association dues
- General closing costs
- Home repairs
As you can see, purchasing your first home can have a major impact on your taxes. With a little research and perhaps some help from your local tax professional, you can recoup some of the costs associated with owning your home.