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The Advantages A Mortgage Interest Tax Deduction Gives You
By EchoBay Loans Staff Writer

Everyone has different opinions when it comes to the decision of renting vs. buying. One clear advantage of home ownership is the tax deductions the mortgage allows you to claim each year. These deductions are available to those who itemize above and beyond the standard deduction each year. Mortgage related tax-deductible items include mortgage interest, property taxes, and points paid on the mortgage.

Mortgage Interest
The IRS allows you to deduct mortgage interest for a first or second home so long as the total debt does not exceed $1,000,000 (this assumes a married couple filing jointly).
Interest for a home equity line or a home equity loan can be deducted as long as the total debt does not exceed $100,000. In both cases, the loan must be secured by your home and you must be legally liable for the debt.

In the first few years of a mortgage, nearly all of the payment is applied to the interest due on the loan. Because of this, a mortgage interest tax deduction can have a significant impact on your tax burden. This is particularly true if the total deductions throw you into a lower tax bracket.

Property taxes
Your annual property taxes are also a tax-deductible expense. The full amount of your property taxes is deductible in the year in which it is paid. Note that the amount that is deductible is the amount that was actually paid to the taxing authority. In many cases, homeowners pay a portion of their property taxes each month to escrow. If you pay $100 per month for property taxes ($1,200 for the year), and the property tax bill was only $1,150, you can only deduct the $1,150.

Points paid on a mortgage
Deducting the points paid on the mortgage loan can be a little trickier than the other allowable deductions. If you meet a set of nine conditions laid out by the IRS in tax topic 504 (as most homeowners do), you may deduct the points in the year paid.

However, if you do not meet all of these conditions, you can still deduct the points paid on your mortgage. But the points must be amortized over the life of the loan. For example, if you paid 5 points on a $100,000 thirty-year loan, that would be equal to $5,000. Simply divide $5,000 by 360 (12 payments per year multiplied by 30 years) to arrive at a figure of $13.89. You can then deduct $13.89 for each mortgage payment you made in that tax year.

If you pay off the loan early, you can deduct the remaining balance of the points in that tax year. The only exception to this is if you refinance with the same lender. In this case, you must roll the remaining balance into the new loan and amortize it, along with points paid for refinancing, over the life of the new loan.

Other tax breaks for homeowners
When you sell your home, new tax laws generally allow a married couple filing jointly to exclude up to $500,000 in gains on the sale of their home provided they have lived in it for two of the last five years. For a single taxpayer, the exclusion is $250,000.

Capital improvements to the home are generally not tax deductible, however, you can add the cost to the basis of your home. To be considered an improvement, it must add to the value of your home or prolong the life of your home. Room additions, driveways, sidewalks, porches and decks would be considered capital improvements. Repairs are not tax deductible or added to the basis of your home. This would include painting, replacing doors or replacing cracked windows.

The basis of your home is important when you sell the property. Let's assume you are single and bought a fixer-upper for $50,000. You made capital improvements to the property including adding a second story and expanding the first floor, which totaled more than $300,000. After living in the house for three years, you put the house on the market and sold it for $375,000. Based on the original cost of the house, you have a gain of $325,000, which exceeds the allowable non-taxable gain of $250,000. You would now owe taxes if you were not allowed to adjust the basis of your house. Because you spent $300,000 in capital improvements, the basis of your home increased to $350,000 resulting in a gain of only $25,000, which saves you on capital gains tax.

There are many benefits to homeownership and the tax-deductible items that a mortgage allows is a great one. You should always consult your tax advisor for advice on your particular situation. In many cases, owning a home can result in owing less to Uncle Sam when tax season rolls around.



From IRS Tax Topic 504:Everyone has different opinions when it comes to the decision of renting vs. buying. One clear advantage of home ownership is the tax deductions the mortgage allows you to claim each year. These deductions are available to those who itemize above and beyond the standard deduction each year. Mortgage related tax-deductible items include mortgage interest, property taxes, and points paid on the mortgage.

Mortgage Interest
The IRS allows you to deduct mortgage interest for a first or second home so long as the total debt does not exceed $1,000,000 (this assumes a married couple filing jointly). Interest for a home equity line or a home equity loan can be deducted as long as the total debt does not exceed $100,000. In both cases, the loan must be secured by your home and you must be legally liable for the debt.

In the first few years of a mortgage, nearly all of the payment is applied to the interest due on the loan. Because of this, a mortgage interest tax deduction can have a significant impact on your tax burden. This is particularly true if the total deductions throw you into a lower tax bracket.

Property taxes
Your annual property taxes are also a tax-deductible expense. The full amount of your property taxes is deductible in the year in which it is paid. Note that the amount that is deductible is the amount that was actually paid to the taxing authority. In many cases, homeowners pay a portion of their property taxes each month to escrow. If you pay $100 per month for property taxes ($1,200 for the year), and the property tax bill was only $1,150, you can only deduct the $1,150.

Points paid on a mortgage
Deducting the points paid on the mortgage loan can be a little trickier than the other allowable deductions. If you meet a set of nine conditions laid out by the IRS in tax topic 504 (as most homeowners do), you may deduct the points in the year paid.

However, if you do not meet all of these conditions, you can still deduct the points paid on your mortgage. But the points must be amortized over the life of the loan. For example, if you paid 5 points on a $100,000 thirty-year loan, that would be equal to $5,000. Simply divide $5,000 by 360 (12 payments per year multiplied by 30 years) to arrive at a figure of $13.89. You can then deduct $13.89 for each mortgage payment you made in that tax year.

If you pay off the loan early, you can deduct the remaining balance of the points in that tax year. The only exception to this is if you refinance with the same lender. In this case, you must roll the remaining balance into the new loan and amortize it, along with points paid for refinancing, over the life of the new loan.

Other tax breaks for homeowners
When you sell your home, new tax laws generally allow a married couple filing jointly to exclude up to $500,000 in gains on the sale of their home provided they have lived in it for two of the last five years. For a single taxpayer, the exclusion is $250,000.

Capital improvements to the home are generally not tax deductible, however, you can add the cost to the basis of your home. To be considered an improvement, it must add to the value of your home or prolong the life of your home. Room additions, driveways, sidewalks, porches and decks would be considered capital improvements. Repairs are not tax deductible or added to the basis of your home. This would include painting, replacing doors or replacing cracked windows.

The basis of your home is important when you sell the property. Let's assume you are single and bought a fixer-upper for $50,000. You made capital improvements to the property including adding a second story and expanding the first floor, which totaled more than $300,000. After living in the house for three years, you put the house on the market and sold it for $375,000. Based on the original cost of the house, you have a gain of $325,000, which exceeds the allowable non-taxable gain of $250,000. You would now owe taxes if you were not allowed to adjust the basis of your house. Because you spent $300,000 in capital improvements, the basis of your home increased to $350,000 resulting in a gain of only $25,000, which saves you on capital gains tax.

There are many benefits to homeownership and the tax-deductible items that a mortgage allows is a great one. You should always consult your tax advisor for advice on your particular situation. In many cases, owning a home can result in owing less to Uncle Sam when tax season rolls around.



From IRS Tax Topic 504:
Exception. You can deduct the full amount of points in the year paid if you meet all the following tests.
Everyone has different opinions when it comes to the decision of renting vs. buying. One clear advantage of home ownership is the tax deductions the mortgage allows you to claim each year. These deductions are available to those who itemize above and beyond the standard deduction each year. Mortgage related tax-deductible items include mortgage interest, property taxes, and points paid on the mortgage.

Mortgage Interest
The IRS allows you to deduct mortgage interest for a first or second home so long as the total debt does not exceed $1,000,000 (this assumes a married couple filing jointly). Interest for a home equity line or a home equity loan can be deducted as long as the total debt does not exceed $100,000. In both cases, the loan must be secured by your home and you must be legally liable for the debt.

In the first few years of a mortgage, nearly all of the payment is applied to the interest due on the loan. Because of this, a mortgage interest tax deduction can have a significant impact on your tax burden. This is particularly true if the total deductions throw you into a lower tax bracket.

Property taxes
Your annual property taxes are also a tax-deductible expense. The full amount of your property taxes is deductible in the year in which it is paid. Note that the amount that is deductible is the amount that was actually paid to the taxing authority. In many cases, homeowners pay a portion of their property taxes each month to escrow. If you pay $100 per month for property taxes ($1,200 for the year), and the property tax bill was only $1,150, you can only deduct the $1,150.

Points paid on a mortgage
Deducting the points paid on the mortgage loan can be a little trickier than the other allowable deductions. If you meet a set of nine conditions laid out by the IRS in tax topic 504 (as most homeowners do), you may deduct the points in the year paid.

However, if you do not meet all of these conditions, you can still deduct the points paid on your mortgage. But the points must be amortized over the life of the loan. For example, if you paid 5 points on a $100,000 thirty-year loan, that would be equal to $5,000. Simply divide $5,000 by 360 (12 payments per year multiplied by 30 years) to arrive at a figure of $13.89. You can then deduct $13.89 for each mortgage payment you made in that tax year.

If you pay off the loan early, you can deduct the remaining balance of the points in that tax year. The only exception to this is if you refinance with the same lender. In this case, you must roll the remaining balance into the new loan and amortize it, along with points paid for refinancing, over the life of the new loan.

Other tax breaks for homeowners
When you sell your home, new tax laws generally allow a married couple filing jointly to exclude up to $500,000 in gains on the sale of their home provided they have lived in it for two of the last five years. For a single taxpayer, the exclusion is $250,000.

Capital improvements to the home are generally not tax deductible, however, you can add the cost to the basis of your home. To be considered an improvement, it must add to the value of your home or prolong the life of your home. Room additions, driveways, sidewalks, porches and decks would be considered capital improvements. Repairs are not tax deductible or added to the basis of your home. This would include painting, replacing doors or replacing cracked windows.

The basis of your home is important when you sell the property. Let's assume you are single and bought a fixer-upper for $50,000. You made capital improvements to the property including adding a second story and expanding the first floor, which totaled more than $300,000. After living in the house for three years, you put the house on the market and sold it for $375,000. Based on the original cost of the house, you have a gain of $325,000, which exceeds the allowable non-taxable gain of $250,000. You would now owe taxes if you were not allowed to adjust the basis of your house. Because you spent $300,000 in capital improvements, the basis of your home increased to $350,000 resulting in a gain of only $25,000, which saves you on capital gains tax.

There are many benefits to homeownership and the tax-deductible items that a mortgage allows is a great one. You should always consult your tax advisor for advice on your particular situation. In many cases, owning a home can result in owing less to Uncle Sam when tax season rolls around.



From IRS Tax Topic 504:

Exception. You can deduct the full amount of points in the year paid if you meet all the following tests.

1. Your loan is secured by your main home. (Generally, your main home is the one you live in most of the time.)

2. Paying points is an established business practice in the area where the loan was made.

3. The points paid were not more than the points generally charged in that area.

4. You use the cash method of accounting. This means you report income in the year you receive it and deduct expenses in the year you pay them. Most individuals use this method.

5. The points were not paid in place of amounts that ordinarily are stated separately on the settlement statement, such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes.

6. The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. The funds you provided do not have to have been applied to the points. They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. You cannot have borrowed these funds from your lender or mortgage broker.

7. You use your loan to buy or build your main home.

8. The points were computed as a percentage of the principal amount of the mortgage.

9. The amount is clearly shown on the settlement statement (such as the Uniform Settlement Statement, Form HUD-1) as points charged for the mortgage. The points may be shown as paid from either your funds or the seller's.


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