Buying a home is a dream come true for most people. While becoming a home owner usually involves a great financial sacrifice, it does come with some perks, besides owning your own home, of course. Many expenses related to your home are tax deductible, and these deductions apply to any type of home: town house, apartment, mobile home, single family residence and more. Unfortunately, this will complicate your taxes, but the extra effort put into detailing your deductible expenses is well worth it.
From the time you become a home buyer until you decide to sell, your home will provide a lot of tax benefits. Consulting a professional advisor in order to get all the details is always a good idea, but here is a list of the top 10 tax deductions for home buyers.
Top 10 Deductions
1. Mortgage Interest Deduction. If your mortgage loan is less than $1 million, then the interest that you are paying is tax deductible. For the first few years, your monthly payment will be mostly made up be interest, so this tax deduction will make our home more affordable, especially if you are a first time home buyer.
2. Points Deduction. When taking out a mortgage loan, your lender charges you a variety of fees. One of these fees is called “points” and one point equals 1 percent of the principal on the loan. Unlike in the case of a mortgage refinance, where the points are deducted over the life of the loan, when buying a home with a mortgage loan, the points are fully deductible up front.
3. Interest Deduction on a Home Improvement Loan. If you take out a loan in order to make “capital improvements” to your home, be aware that the interest on this loan is tax deductible. Capital improvements are improvements to your home that increase its value or extend its life, and should not be confused with simple repairs. In case of a loan taken out for repairs to your home, the interest will not be deductible.
4. Equity Loan Interest Deduction. A portion of the interest that you paid on a home equity loan or line of credit can be deducted, but there is a limit set by the IRS on how much you can treat as home equity. This limit is $100,000 for a family or $50,000 per each member of the married couple, or the home’s market value.
5. Property Taxes Deduction. A large part of your monthly mortgage payments will be represented by property taxes. The amount is held into an escrow account in order to pay the property taxes yearly. You can only claim this tax deduction when the money is taken out of the escrow account and paid.
6. Private Mortgage Insurance (PMI) Deduction. When getting a mortgage loan, if your down payment is less than 20 percent, you will usually be required by your lender to pay a Private Mortgage Insurance. This type of insurance can represent a large portion of your monthly payment, and it is tax deductible, but only for those who qualify.
7. Selling Profit Deduction. Up to $250,000(or $500,000 for a married couple) of the profit that you or your family make from selling your home is tax deductible, with the condition that you have owned your property for at least 2 years and the home has been your primary residence for 2 of the past 5 years.
8. Home Office Deduction. If part of your home is used as an office, you will be able to deduct a percentage of your mortgage and utilities. There are a few requirements, in order to qualify for this deduction: your home office has to be your primary office location for your business, it must be used only for business, and its size has to be realistic.
9. Health Related Improvements Deduction. Making improvements for medical reasons to your home can be tax deducted, as long as the improvements are made for a chronically ill person.
10. Moving Expenses Deductions. If buying your home is a result of your need to relocate for work, then you might be able to deduct the cost of moving and other related costs. However, your new job must be more than 50 miles further from where your old job was.
Buying a home can provide some important benefits when the time comes to file your federal tax return. From deducting your mortgage interest, to tax deductions related to your relocation, there are a lot of areas in which you can save money, as long as you qualify and do your research.