Most people have a dream of owning their own home. Yet, buying a home all on your own without the help of a bank is something that is just too good to be true. This is because a large majority of the population needs to take out mortgage loans to get their dream house in their possession. And this is just one of the many instances where people make use of bank loans. In addition to the fact that it provides you upfront cash to fulfill your need, if you have ever taken out a loan, you will know that it has a number of tax advantages that you can avail.
Did you know that you can deduct your mortgage interest payments off your tax bill? This is a common tax advantage that most people know about. However, there are also some taxes advantages of mortgages that many homeowners tend to overlook. If you hire a tax accountant like us, you will discover that home owners who get their mortgage payments refinanced are also able to use those points to cut down their tax bill, because we, at David C. Ellwanger, deal with points every day.
Just to be clear, points here are not the ones you get when you accomplish a task, play a game of league soccer or tennis. These are points which are basically the amount that you have to pay as a sort of fee or penalty to have your loan refinanced.
Each point that you get is around one percent of the total amount of the loan. Typically, borrowers pay points to ensure that they have to deal with lower mortgage rates while lenders charge points as a way of making a profit. When you are getting your mortgage refinanced, the amount that you will pay them will generally be listed on your 1098 statement from the lender. This is also the document that contains details of the mortgage interest that you have paid, both of which are deductible off your tax bill.
Finding a tax professional for mortgage point tax deductions is important since they know the ins and outs of the law and the IRC tax codes. They can help you identify the law that governs this aspect and help you make the most deduction off it. On a normal mortgage that is set at a yearly fixed rate, the points of the loan will either be paid by the seller or the buyer, or the amount may be split between them.
Irrespective of who pays, the buyer can still claim tax deductions for the amount paid as points. Points paid or the refinancing of a mortgage loan can be claimed back in the same year that they are paid and the requirements that need to be fulfilled in this regard are as follows:
The mortgage is on the home where you live or spend most of your time in i.e. your primary residence.
Paying points should be a generally acceptable business action in your area.
The points that you have been charged should be an average amount, one which is not too high.
The points cannot be paid against fees that are ordinarily stated such as fees for inspection, lowered rates or any appraisal, title fees, property taxes, attorney fees, etc.
The loan that is taken out should be for the purpose of either buying or building your primary home.
The amount that is to be deducted needs to be clearly shown as settlement points that have been charged for the refinancing of the mortgage.
The points must be calculated as a percentage of your principal loan amount.
Some of these prerequisites can be difficult for all the individuals to understand and hence, people are encouraged to find a tax professional for mortgage point’s deduction or a tax accountant to help them out.
In most cases of refinancing of mortgage loans, the homeowner is able to deduct any points earned over the course of the loan life. Yet, if some of the mortgage that is refinanced, has been used to improve the main home and the requirements above are met, the person can get all the points reimbursed, if they have been deducted in the same year.
Sometimes, there are also cases where you will be advised by your tax accountant to use your refinancing option to avail a home equity loan or extra cash and use the money for something other than its intended purpose. If you have done so with the help of a tax accountant, you can even get the points for this deducted, but this happens over the life of the equity loans term, in small parceled amounts.
But first, how do you find out the annual amount that will be deducted over the life of the loan? For this, you will need to do two things. One, find a tax preparer that is efficient in their work such as those working with us, and second, get information with regards to this amount from your lender. So that when you pay the amount at any point in time, you can divide it by the years of the loan left and reach the total loan deduction amount.
There are some people who are known as serial refinancers. These are people who get their loans refinanced more than once. Although this was typically done in times when the property market was at its peak, some people continue to do it still. However, if you ask a good tax accountant, this is not a recommended practice. Yet, getting their loan refinanced more than once can earn people a tax relief. This means that even if they take another loan, the points earned from the first refinancing can still be used for tax deduction irrespective of the second loan.
People who spend a lot of time in finding a tax preparer or a tax professional for mortgage point’s deduction are ultimately saving time by ensuring that they have an expert’s advice at hand in case of an emergency. We, at David C. Ellwanger, CPA, P.C. believe in providing our customers with our utmost support. If you want to schedule an appointment and seek our help on your tax problems, just click the link below.
