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Tax Benefits Of Home Ownership


Purchasing a home can bring with it income tax benefits that are worthy of consideration when deciding whether to buy a home. Yes, buying a home is a rather large expense, but when you think about the fact that the money you pay out each year in taxes brings little tangible return, while money spent on your home brings the pleasures of ownership plus equity built, you might want to check into the tax benefits of buying. Following is a list and explanation of the typical deductions.

Mortgage Interest

Perhaps the largest deduction for a new homeowner is the interest paid on the mortgage loan. Remember that in the first years of any mortgage, most of the money paid each month (or bi-weekly) applies toward interest. Interest is generally fully deductible.

EXAMPLE:
You've taken out a mortgage of $100,000 at 7.5% on your new home. You've made payments toward the principal and interest for the full year. Those payments totalled almost $8000.00. Of the $8000.00, approximately $7000.00 went toward interest, and almost $1000 went toward the principal. The $7000.00 is tax deductible.

To claim the mortgage interest deduction, you must fill out a Schedule A, "Itemized Deductions". You should receive a form 1098 from your lender in January for the tax year prior. The form 1098 contains information needed to take the interest deduction.

Points Paid

Points paid at closing on your new home are deductible if they are considered pre-paid interest. There are certain restrictions involved in the deduction of points. All of the following requirements must be met:
  • The mortgage loan must be secured by your main home.
  • Paying points must be the norm for your area.
  • The points paid must not be more than what is considered normal in the area.
  • You must use the cash method of accounting.
  • The mortgage loan must have been used to buy, improve or build your home.
  • The points must be calculated as a percentage of the loan principal.
  • The points must be clearly set apart on your settlement statement.
  • You must have used your own cash (down payment) toward your home purchase in an amount at least equal to the points you were charged.

Property Taxes

Your property taxes are fully deductible on your income tax return. Money held in escrow toward the payment of your taxes is not deductible, but the actual payments from the escrow account toward the property taxes are.




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