Real Estate Related Tax Deductions
While the reasons for buying your own home and officially becoming a homeonwer include ideals such as investment, security, family, and longevity, there are also several financial reasons why buying a new home for sale can also benefit you monetarily. As tax season approaches, information about real estate related tax deductions should help you when preparing your tax returns and filing your taxes. Below are just a few of the benefits of homeownership related tax breaks.
1. Deduction of Your Mortgage Interest
This is probably the most well-known benefit of owning your own home. Instead of paying an almost identical payment in rent for a home of approximately the same size and value and literally “throwing away” your money, with mortgage interest deduction, you can deduct your interest from your gross income to reduce the amount of overall taxes you pay. Because mortgage interest makes up the bulk of your initial payments to a lender, interest amounts can be substantial for a 12-month period depending on your loan amount.
2. Deduction of Mortgage Insurance Premiums
This is a much lesser known deduction that homeowners sometimes miss when they are filing their taxes. Many homeowners don’t even know that they are allowed to deduct their private mortgage insurance (PMI) from their taxes. PMI is charged by a lender when the loan amount is greater than 80% of the home’s appraised value, or loan to value ratio. Sometimes this is calcualted immediately in an FHA loan situation where the buyer is not putting the tradition 20% down on the purchase of their home. Other times, it is calculated during a refinance where a homeowner has taken out a home equity line of credit to make improvements or pay off debt. When the loan’s value reaches 80% of the appraised value of the home, PMI can be removed at the discretion of the lender – it automatically comes off when the value is 78%. Regardless, this amount of approximately $80 – $150 / month can be deducted from your taxes if you are a homeowner.
3. Deduction of Prepaid Interest
While many people have noticed reductions in their credit scores because of employment issues and debt issues during the Recession, it is still possible as a homeowner to “buy a better interest rate” by using points. When the appraised value of the home is high, and the loan amount is low, it is possible to spend some money initially during the mortgage process to pay points to achieve a better interest rate. Points can be paid for ever 1/4% of interest to buy down your rate. If you have the “breathing room” of excellent equity in your new home purchase, you may consider lowering your monthly payments by purchasing a better rate. If you are buying a home in the calendar year of which you are doing your taxes, you are able to deduct the entire amount of prepaid interest that is added up in your closing costs. If you are refinancing, you are able to deduct your prepaid interest over the length of your refinanced loan – not all at once.
4. Deduction of Property Taxes
Part of the joy of owning your own home is that you are required by St. Tammany Parish to pay property taxes on your home each year. If the home you are buying is your primary residence, you are able to get a Homestead Exemption which offsets the total value of your home and only charges property tax on the rest of the home’s value. Either way, as a homeowner of a primary residence or a second home not used as a rental, you are able to deduct the entire amount of your property taxes from your overall tax bill.
5. Deductions for Energy Improvements
The government still has many energy efficiency tax deductions available for those homeowners who upgrade or renovate their home to make them more energy efficient. They are called tax credits and typically are applied for new systems that are added to your home, such as solar panels, double-paned windows, and upgraded HVAC / furnace systems. You can research further to find all of the items that are tax deductible and have government funded tax credits for energy efficiency upgrades.
As you can see, in addition to investing for you or your family’s future by buying a new home in St. Tammany Parish, you can also enjoy the benefit of tax deductions which will increase your refund or reduce the amount of taxes owed.
