Buying a Home 

Pride of Ownership.

Appreciation:

Real Estate market moves in cycle, up and down over the years. Real Estate has consistently appreciated (House Price Index), Home investment is a hedge against inflation.

Mortgage Interest Deduction:

Home ownership is a great way to shelter against income tax. Mortgage interest is fully deductible on your tax return. Interest is the largest component of your mortgage payment.

Property Tax Deductions:

Estimate of 1% of assessed value.

Capital Gain Exclusion:

As long as you lived in your house for two of the past five years, you can exclude up to $250,000 for an individual and $500,000 for a married couple of profit from capital gains.

Mortgage Reduction Builds Equity:

Each month, part of your monthly payment is applied to the principal balance of your loan, which reduces your obligation.

• Equity Loans:

  Consumers who carry credit card balances cannot deduct the interest paid, which can cost as much as 18%-20%. Equity loan interest is often much less and is deductible. For many home owners, it makes sense to pay off this kind of debt with a home equity loan. Consumers can borrow against a home’s equity for a variety of reasons such as home improvement, college, medical or starting a new business.

When most people buy a home, they generally obtain a mortgage. Mortgages have costs and one of those costs is the “loan origination fee.” The loan origination fee is usually a percentage of the loan amount, generally expressed as “points.” For example, one “point” on a $150,000 loan would be $1500. One and a half points on the same loan amount would be $2250. On VA and FHA loans, points are often broken down into two categories: loan origination fee (which is usually one point) and discount points (which are also a percentage of the loan balance). Both are deductible. The loan origination fee must be expressed as points in order for it to be tax deductible. 

When buying a home, points are deductible in the year they are paid, providing they meet certain conditions. The main conditions are the mortgage is secured by the home you live in most of the time and that you used this mortgage to either purchase of build your home. 

However, there are other conditions. Your lender cannot inflate the points to include other items you would normally be charged. When buying a home, there are normally other charges such as appraisal fee, title insurance fee, property taxes, settlement fees, and so on. If by some miracle you are not charged these fees but your “points” are higher than normal, in this case you cannot deduct the points. 

The cash you put into the deal must also exceed the amount charged in points. In other words, if your points were $3000, but you only had to put in $2000 to close, the IRS knows something is up. Your lender is inflating your loan amount to cover your points. Although a lender can technically do this, you wouldn’t be allowed to deduct the points. The only other major condition is that the points must be clearly stated on the HUDI Settlement Statement. This is a document you receive after closing that clearly lays out all the costs involved in buying the home. The seller also receives a HUDI. 

When purchasing a home, sometimes the buyer negotiates for the seller to pay some closing costs, including the points. If the seller pays the buyer’s points, the Internal Revenue Service allows the buyer to deduct this as an expense on their federal tax returns. However, the seller cannot deduct them, too. Paying the buyer’s closing costs, including points, merely reduces the not gain on the home for purposes in calculating capital gains taxes (which are usually deferred). 

With two exceptions, other closing costs are not deductible. Those except are pre-paid interest and pro-rated property taxes. When you buy a home, you may close on any day of the month. However, most lenders want their mortgage payment due on the first of each month. So if you close on the 20th, for example, you “pre-pay” ten days of interest as part of your closing costs. The ten days of interest pays you up to the end of the month. Your first mortgage payment will not be on the first of the following month, but the month after that. Unlike renting, where you pay in advance, mortgages are paid in arrears. 

Since interest is deductible expense, prepaid interest is also deductible. A similar thing happens with property taxes. The seller’s last property tax payment may have covered part of the time where you will actually be the owner of the home. The settlement agent will calculate how much of that last bill you should pay and charge it to you as a closing cost called “pro-rated property taxes.” This is also deductible.

Homeowner Tax Deduction List