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Home Buying Tax Deductions

One of the major differences between owning a home and renting one is the allowable home buying tax deductions.

The tax deductions can have a serious impact on the overall cost of comparing renting vs. buying. One of the advantages of owning a home is the tax savings benefit. If you have purchased a home in the last year you are going to want to make sure that you have

The list below summarizes the deductions that many people forget about when buying Real Estate. While those that have owned a home before may be familiar with some of these tax deductions many first time homebuyers are not.

This is just a guideline for you to have a more detailed conversation with your tax professional. Tax laws change each year and those who pay state income taxes may have other deductions available to them as well.

Mortgage Points:

Points paid when taking out a mortgage are tax deductible if they are used to reduce the mortgage interest rate. Points or origination fees paid when you buy a home or other Real Estate are generally valid home buying tax deductions in full for the year that you pay them. It should be made clear that origination charges from the lender that constitute a “service fee” are not tax deductible.

Another method you could make is to amortize the points over the term of the mortgage. This choice is usually made only when your itemized deductions are less than the standard deduction for the year you purchased the home.

Additionally when you refinance a mortgage the points must be deducted over the term of the loan. If you deduct points over the term of the loan and sell the home or refinance it again before the loan expires, you can deduct in the year of the sale or refinancing any points that you didn’t previously deduct.

Prorated Mortgage Interest

When you are buying a home, depending on when in the month the home is closed, the buyer pays either a small or large amount of pro-rated mortgage interest for that month they close. This amount of prorated mortgage interest can be written off. Refer to your final HUD settlement statement for the exact figure.

Prorated Real Estate Taxes

Sometimes a seller will pay the local tax collector’s office for Real Estate taxes prior to the closing. In some circumstances, however, the buyer will pay a pro-rated portion of the taxes for the year at closing.

Construction Loan Interest For New Homes

As long as the construction period doesn’t last more than two years before you make the new home your “principal residence,” you can write off the interest for that new construction loan.

Mortgage Prepayment Penalties

It is not all that common today to find mortgages with prepayment penalties, however it is certainly not impossible to have one. If your mortgage does include a prepayment penalty and you finish all the loan payments early, the penalties will be tax deductible. While not all that common it is still a tax break worth checking into.

Mortgage Interest Tax Deduction

From a tax perspective one of the best features of owning a home or other real estate is the ability to claim a mortgage interest tax deduction on your tax return. Mortgage interest is tax deductible on mortgages of up to 1 million dollars ($500,000 if married and you are filing separately) as long as you use the money to buy, improve, or build an addition on your home and the mortgage is secured by the property.

Additionally, the interest you pay on loans secured by your home and used for a purpose other than to buy, build or improve your home is tax deductible for loans up to $100,000 ($50,000 Married Filing Separately). In other words if you used a home equity line of credit to purchase a car the interest on this 2nd mortgage would be tax deductible as well. This is a home buying tax deduction you absolutely do not want to miss!