Congratulations, you've just taken another step up the American dream ladder and are a homeowner. Along with the joy of painting, plumbing and yard work, you'll now have an added dimension to your taxes.
The good news is that you can deduct many home-related expenses. These advantages apply to any type of residence -- mobile home, single-family, townhouse, condominium, or cooperative apartment. If you've just fulfilled the American dream for the first time, check out Bankrate's guide for first-time home buyers.
The bad news is that to take full tax advantage of your home, you need to itemize your deductions on Schedule A. You're not living on "EZ" Street anymore; you've moved to the 1040 long form.
What expenses can you deduct as a homeowner? The major ones are reflected in your house payment, which you probably are making to a bank. When you got the loan, you learned that the check you send in each month pays for a lot more than just the structure.
Deductible at a Glance
Each January, your lender will send you a statement, usually Form 1098, detailing just how your payments were allocated.
- Mortgage Interest
- Property taxes
- Home equity loan interest
Mortgage interestIf that annual statement were presented as a pie, you'd see that the actual paying down of your loan principal is the smallest slice. And the biggest piece is the interest your lender collects. That's why it's going to take you 30 years to own your home, but during most of that time you'll be able to use the interest paid to reduce your tax bill.
Mortgage interest is one of the last remaining personal interest deductions that our tax laws allow, so use it. You enter the amount your lender reports to you on line 10 of Form 1040, Schedule A.
PointsAlso mentioned on this part of Schedule A are points. A point is a percentage of your loan amount and is a one-time fee paid to obtain a loan or reduce the loan rate. Points also are called loan origination fees, maximum loan charges, loan discount or discount points. The IRS does have guidelines for deducting points, but most home buyers find the points they paid are fully deductible in the year paid.
Using taxes to reduce taxesThe other major deduction in connection with your home is your property taxes.
If your house payment includes an escrow amount for payment of taxes, the annual information you get from the bank is a good way to check that those property taxes were paid. You certainly want to ensure that the state or local tax collector doesn't come looking for you. But you also want to keep track of this amount so that you can include it as a deduction on Schedule A.
These taxes will be an annual deduction as long as you own your home. But if this is your first tax year in your house, dig out that settlement sheet given to you when you closed the deal. You will find additional tax payment information there. When the property was transferred from the seller to you, the year's tax payments were divided so that each of you paid the taxes for that portion of the tax year during which you owned the home. Your share of these taxes is fully deductible.
Escrow cautionA word of caution: If your settlement statement shows any money you paid into an escrow account for future taxes, this amount is not deductible. You can only deduct the taxes when your lender actually pays them from the escrow account to the property tax collector.
For example, you buy your house on July 1. Your property taxes are due on Jan. 1 each year. When you closed, the seller had already paid the year's taxes of $1,000 in full so you reimbursed the seller half of his annual tax payment since you are the owner for the last six months of the year. Your $500 reimbursement to the seller is shown on your settlement documents.