Purchasing a house can be an exciting time in your life. A home can mean yearly deductions throughout your time owning the property. However, there are also some tax deductions that you can receive right away as part of your home purchase. So it is important to know what potential tax benefits you can receive, but what also will not result in a tax deduction. Working with a tax professional or accountant, such as R&S Tax Service Inc in Folsom, CA, you can determine which deductions will apply to your home purchase. Here is some guidance about what might qualify and what will not.
Basic Overview
Closing costs are incurred to complete your mortgage and to transfer the ownership of the property into your name. This will also allow for escrows to be set up for insurance and property taxes. The permissible closing costs must be itemized on your Schedule A of your tax return. However, to take advantage of these potential deductions, you need to itemize versus taking a standard deduction. Additionally, you will have to track each potentially deductible expense and the amount paid on your return.
After completing your closing, you will receive a settlement statement that includes an itemized list of your closing fees and what you paid. Keep this with you to assist in filing your taxes and claiming all the costs you might have incurred and thus allowing you to claim the proper number of deductions.
Mortgage Interest Deduction
For a vast majority of homeowners, their home purchase will require that they get a mortgage to finance their purchase. Mortgage interest will be paid throughout the life of the loan, but will also need to be paid at closing to cover the remainder of the month in which the funds were released for the home purchase. The total amount of this interest is tax deductible. For example, a borrower who closes their transaction on the 15th of the month must pay the lender mortgage interest for the remaining days of the month. Therefore, if a loan was funded on January 15th, then the home buyer would be funding 16 days’ worth of interest to the lender.
This interest payment need to be listed on your tax return. However, you will need to have received a 1098 from your lender in the January following the year you purchased your home. Keep in mind that this interest is typically prepaid, often before you make your first mortgage payment.
Property Taxes at Closing
When you close on your home, you will need to pay a portion of the real estate taxes owed on your new property. Since property taxes are paid on an annual or semi-annual basis, the settlement agent who is handling your closing will collect property taxes from the previous owner for the timeframe that they owned the home during the year and they will collect the rest of the year from you.
If the seller had already prepaid the property taxes for the year, then they will be entitled to a reimbursement of those prorated taxes. At minimum they will need to be reimbursed through the end of the month that the closing occurred. These property taxes are potentially deductible, since you will be responsible for all the property taxes from the date of sale going forward. Additionally, those property taxes will be deductible every year that you own the property.
Points on Your Home Mortgage Loan
Borrowers may choose to pay for points, which are equal to 1 percent of the loan amount. These points can be used to pay for the origination fees, application, approving and funding the loan. However, you can also purchase discount points, which can be used to receive a reduction in your interest rate over the life of your loan. These discount points can typically lower your interest rate by .25%. Another type of charge is a lender’s premium, which also can be expressed in points. A borrower can choose to buy these points to pay for any closing costs associated with the loan.
As a result, these points can be tax deductible. So you will need to use your settlement statement to determine how many points you have on your loan and how much of a deduction you may qualify for. By using your closing statement wisely, you can see your tax liability go down as a pleasant benefit to your home purchase.
