Buying a house will give you tax deductions for years to come, but the benefits start when you close the loan. You can deduct some of the closing costs you pay when you settle or complete the mortgage. The mortgage has to be in your name -- jointly if you're filing a joint tax return -- and you have to claim the deductions in the year you close the loan.
Settlement Statement Tells
Your best tax deduction friend is the settlement statement, usually a HUD-1 form. This lists line by line all the closing costs with notations, what they cover and whether or not they are deductible. In general, you can deduct interest, any discount points you paid and any real estate taxes paid at closing.
Your big deductions will be loan origination fees and points. Loan origination fees and points may be lumped together. Origination fees are charges by a lender to give you a loan; points are computed as percentages of your loan amount. The settlement statement has separate lines for origination fees and points; report either line or both lines as itemized deductions on Schedule A of your tax return.
Prepaid Interest and Taxes
You can deduct any prepaid interest and funds you pay into an opening escrow account for local taxes. You generally have to put up this money to cover interest and taxes between the time you close the loan and your first monthly payment. Prepaid interest will be reported to you by your lender on a Form 1098. The up-front amount is calculated on charges between the time you close and the next regular tax bill.
Private Mortgage Insurance
You usually can't deduct private mortgage insurance, or PMI, which is required on some home loans, but there are some exceptions. You can deduct some of the PMI cost if your adjusted gross income is under $100,000 for and you are married filing jointly. The limit is $50,000 if you file independently. You can't deduct the entire cost; the amount you are allowed to deduct will be shown on your Form 1098 interest statement from your lender.
You can't deduct hazard insurance, mortgage insurance if you don't qualify for a special exemption, lawyer or Realtor fees or commissions, or fees for credit reports and appraisals. Charges such as pest inspections, recording and notary fees and title searches and insurance are not deductible but can be added to the basis or value of the house to be deducted when you sell it.
- Internal Revenue Service: Publication 530
- Internal Revenue Service: Taxes
- Internal Revenue Service: Publication 936
- Internal Revenue Service: Home Mortgage Points
- Turbo Tax: http://turbotax.intuit.com/tax-tools/tax-tips/Home-Ownership/Tax-Breaks-and-Home-Ownership/INF12064.html
- Bankrate.com: Are Origination Fees Tax-Deductible?