It’s that time of the year again – tax time. But don’t worry the BSW Real Estate Group is here to help with info on tax breaks for homeowners! Did you know that owning a home can pay off during tax season? Make sure you take advantage of the following home ownership related tax deductions and strategies to lower your tax bill.
1- Mortgage interest
First off, your monthly house payment, which for most homeowners is made towards the interest, which is the biggest tax break for homeowners. Unless your loan is more than $1 million or $500,000 if you’re married filing separately, all the interest you paid to buy, build, or improve your home is deductible. The mortgage interest deduction will be claim on schedule A, which is a part of Form 1040 where you list your deductions. If you took on another mortgage to either improve your home or to buy or build a second home, it will count towards the $1 million limit.
2- Prepaid Interest (or points)
Did you pay points (prepaid interest) when you took out your mortgage? This is generally 100% deductible in the year you paid it along with other mortgage interest. That being said if you refinance to get a better rate, you will need to deduct points over the life of your mortgage. Per example, if you refinance into a 10-year mortgage and pay $3,000 in points, you can deduct $300 per year for 10 years. Also, points paid on a loan secured by a second home or vacation residence, despite how the cash is used, must be amortized over the life of the loan.
3- Property taxes
Another major deduction will be your property taxes. In fact, you can deduct on schedule A the real estate property taxes you paid. If you have a mortgage with an escrow account, the amount of real estate property taxes you paid will appear on your annual escrow statement. If you purchased a home this year, take a look at your HUD-1 settlement statement to see if you paid any property taxes when you closed on your house, because those taxes are deductible on Schedule A, as well.
4- Thinking about selling?
If you decided to move up to a larger home, you’ll be able to avoid some taxes on the profit you made. Indeed, up to $250,000 in sales gain ($500,000 for married, filing jointly) is tax-free as long as the homeowner owned the property for two years and lived in it for two of the five years before the sale. Second home sales can also benefit some deductions but the law says that you’ll owe taxes on part of the sales money based on how long the house has been used as a second residence.
If you are looking for more specific advices about tax deductions for homeowners, please contact us and we will put you in touch with some of our trusted professionals.