The forms you need to fill out when you purchase your home are just the start. We understand that first-time home buyers have years of mortgage and insurance paperwork to look forward to. To help you sort through that pile of paperwork and ensure you are saving as much money as possible we have done some research into tax benefits that can come from buying.
1. You can deduct the interest you pay on your mortgage.
The home mortgage interest deduction is probably the best-known tax benefit for new homeowners. This deduction lets you deduct all the interest you pay toward your home mortgage with a few exceptions including:
Your mortgage cannot be more than one million dollars.
Your mortgage must be on a qualified main or second home.
Your mortgage needs to be secured by your home.
Do not assume that if you are married and file a joint tax return, you need to own your home together to claim the interest. The home can be owned by you, your significant other or jointly, for purposes of the deduction. The deduction will count the same either way.
Don’t worry about keeping track of how much you are paying in interest versus principal every month. Towards the end of the year, your mortgage lender should issue you a form 1098. This reports the amount of interest you have paid during the year.
2. You might be able to deduct points.
Points are essentially the prepaid interest that you offer upfront at closing to improve the mortgage rate. If you pay more points, you will get a better deal.
You could deduct points in the year you pay them if you meet certain criteria. Points need to be paid on a loan secured by your main home and that loan must be to buy or build your main home.
3. Depending on your income level and the year, you might be able to deduct PMI.
Private mortgage insurance or PMI protects the bank in case you default. PMI might be required as a condition of a mortgage for first-time homebuyers, especially if they cannot afford a large down payment.
For many years, PMI is not generally deductible and the specific rules around it annually change. Last year, if you made less than one hundred nine thousand dollars per year as a household, you can claim a tax deduction for the cost of PMI for both their primary home and any vacation homes.
4. Real estate tax is deductible.
Real estate tax is imposed by local or state governments on the value of your property. Many banks or other mortgage lenders will factor the cost of your real estate tax into your mortgage and put these amounts into an escrow account.
You cannot deduct the amounts paid into the escrow, but you could deduct the amounts paid out of it to cover the taxes. You will see this amount on a form 1098 issued by your lender at the end of the year.
If you do not escrow for real estate tax, you will deduct what you pay out of pocket directly to the tax authority. And remember those taxes you paid at settlement. If you reimburse the home seller for taxes already paid for the year, you can deduct those too.
Those amounts will not show up on a form 1098, so you will need to check your settlement sheet for the totals.
Are you looking to buy a home in the Rocklin area? Click here to contact Kortney Williams today!