With April 15 looming just around the corner, our thoughts have turned to tax preparation lately. Always on the lookout for deductions, many of us are relieved to learn of a new area where we can save a little money. Homeownership brings some tax breaks, but unfortunately not as many as are mistakenly assumed.
The largest tax perk to owning a home is to deduct your mortgage interest. In order to take advantage of deducting your mortgage interest payments, you must itemize your deductions when you file your taxes. Remember, you can only deduct the interest portion of the payment, meaning that whatever you are paying toward the principle you cannot deduct. Towards the end of your mortgage period, you will be paying very little in interest. Under normal circumstances you can also deduct the interest on an equity line of credit or a refinance, as long as you don’t owe more than the home is worth.
Deducting points is another way to save on your taxes. Specific guidelines determine whether you can qualify for this deduction. If you paid points on a new mortgage, you must deduct the points in the year you paid for them. If you pay points on a refinance, you must deduct them over the life of the loan. However, there is a major loophole in this rule. If you use the money from your refinance to remodel your home, you can fully deduct the points in the same year. The same applies for equity lines of credit. One note, you can only deduct the portion of the points that applied to how much of the refinance you actually spent in home renovations. If you use a portion of the money for another purpose, you may have to amortize the deduction over a period of years.
Some may be able to deduct mortgage insurance. Typically, you cannot deduct mortgage insurance. PMI is normally required by lenders if your down-payment is less than 20%. However, a new law allows for some to deduct this insurance. The law stipulates that if you obtained your mortgage between Jan. 1, 2007 and Dec. 31, 2009, and your AGI is less than $100,000, you can deduct your PMI premiums.
Appeal your property tax bill. Especially with home values falling recently, your home may be over-assessed, thus sticking you with a higher property tax bill than you deserve. If you feel this is the case, there are a few steps you can take. If you are one of the many homeowners who feel their assessed value is too high, you have 30 to 60 days to make an appeal to your local property assessor’s office. Because you have the potential to potentially save thousands of dollars, it is advisable to do your research ahead of time. Compare your home’s assessed value to your neighbors, get a local realtor’s opinion, and research the local home sale data. As scary as it can be to confront the IRS, you can actually win one of these appeals.
Deduct your property taxes. Deducting your annual property taxes is another big tax break for homeowners.
One of the common misconceptions concerning deductions is that you can deduct materials and repairs. General repairs and renovations cannot be deducted immediately, but may help you if you convert the home into a rental or when you sell. They can help you eventually, so be sure to save all receipts and invoices.