Whether you already own a home or are a first-time homeowner, buying a house can be an exciting investment. But before you start picking out curtains, you should think about the financial benefits of your big purchase. Buying a home as a residence or an investment property can also provide valuable tax deductions. Whether you're buying your first home or your fifth, careful planning will allow you to take care of these tax deductions so that you have plenty of cash left over for your family and for decorating your new home.
Purchasing Your Home
Pick a home that you love for your next residence or investment property. You should plan to purchase your home with a mortgage, because mortgage payments provide an opportunity for tax deductions. Meet with different lenders to get the best rate for your mortgage. Make sure to get a copy of your credit report before meeting with your lender to ensure that it is accurate. An accurate credit report will ensure that you get the best mortgage terms. Once you have secured a favorable mortgage, it's time to close the purchase on your home. Make sure to keep all documentation of your mortgage and home purchase to use as support for your tax deductions.
Lots of payments associated with your new home can serve as tax deductions. Deductible payments made for your home will be included with your personal tax returns, but payments made for rental homes will be deducted using IRS form "Schedule E." Deductible payments include mortgage interest payments, mortgage insurance payments and real-estate taxes.Deductible mortgage interest payments include some prepayment penalties and late fees. Additionally, "points," also known as loan-origination fees, may be deducted sometimes. However, you may have to deduct "points" over the life of your mortgage rather than in one year. Finally, at the time of publication, if you were a member of the uniformed services, a first-time home buyer, and the value of your home was less than $800,000 you might also have been entitled to a first-time home buyer credit. This credit was valued at up to $8,000.
Real-estate taxes that you pay at your home closing are fully deductible. You will indicate these taxes on Form 1040 when you file your federal tax return. However, if any of the taxes owed on your real estate are delinquent, you can't count those tax payments towards your deductions. Finally, if you get a refund or a rebate on real-estate taxes paid by you, then your real-estate tax deduction must be reduced to reflect that refund. You should talk about specific tax questions with your tax preparer to ensure that you have complied with all IRS regulations.
While lots of costs are deductible, many home-ownership expenses are not. Home-ownership expenses that are nondeductible include homeowner's insurance, wages paid for hired help, depreciation, utility expenses, or forfeited down payments or deposits. Although these expenses may be large, they do not offer any tax benefits.
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