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Realty/capital gains
Home, sweet home. It's likely your biggest investment and it affords you some great tax breaks to boot.
 
First-time homebuyer's guide to taxes
First-time home buyer's guide to taxes
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2. Making the most of mortgage interest
If you do find that itemizing is the way to go, your largest write-off is probably going to be the interest you paid on your mortgage. This is a particularly valuable tax break in the early years of a home loan, when most of your monthly payments go toward interest charges.

"Just make sure you count all of it," says Gronsky. "It doesn't have to be paid to an institutional lender. It can be a private loan."

A common private home-loan is one obtained through seller financing, where you make your monthly payments to the seller instead of a traditional lender. Interest paid to the seller is deductible, as long as the loan is established using the same guidelines as for a conventional bank mortgage.

The same is true if you borrow money from a relative for your house purchase, says Gronsky. Again, you need to be sure this is documented properly (it's probably a good idea to have an experienced real estate lawyer help you set up this arrangement) and that an appropriate interest rate is charged.

But as long as the money is secured by the house, says Gronksy, it's a mortgage, and the interest is deductible.

3. Hang onto your HUD-1
Regardless of who holds your mortgage, the lender should send you a Form 1098 or similar document in January. This will list all the interest you paid over the previous tax year. You report that interest amount on either line 10 or 11, depending upon the mortgagee, of your Schedule A.

New homebuyers, however, shouldn't rely solely on that 1098 information.

"It is possible that for a new homebuyer, the amount on the form is not quite accurate," says Benny L. Kass, who practices law in the Washington, D.C., area with the firm Kass, Mitek & Kass PLLC.

"You settle on July 10," says Kass. "Your first payment typically will be due Sept. 1. When you make that payment, you will pick up interest for the month of August. But since you borrowed on July 10, many lenders will charge interest from the 10th to the end of July. That amount covering those days in July is deductible."

Not all lenders, however, will include that initial adjustment of interest for that first month, July in this case, says Kass. "Make sure you pick that up."

You'll find that added amount of interest on your closing statement, usually referred to as the HUD-1.

-- Updated Jan. 10, 2008
 
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