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There are many financial benefits to owning your own home, including some nifty tax write-offs. However, you'll have to itemize your deductions when you file your federal income tax return to take advantage of them. While there are a number of homeowner-related items you can deduct, the cost of obtaining title insurance is not one of them.
A title insurance policy is an accepted part of the closing process for many real estate transactions. A real estate title on the home you want to buy might have a number of claims, encumbrances or rights against it, such as tax lien, a judgment or an unsatisfied mortgage. Mortgage insurance companies typically investigate the title prior to issuing a policy to ensure there are no encumbrances. If an encumbrance is discovered, you have the option of clearing the claim before your proceed with the purchase. If no encumbrance is discovered, the company that issued title insurance policy is typically obligated to defend your title in court, and to settle any claims so you can maintain possession of your property.
The Internal Revenue Service recognizes four categories of homeowner expenses that are tax-deductible, including real estate taxes, sales taxes, mortgage interest and private mortgage insurance premiums. You can deduct real estate taxes that are assessed against you and that you actually pay in the year that you pay them. You have the option of deducting either your state and local income taxes or your state and local sales tax. The amount of sales tax you pay when you purchase a home might make it advantageous to choose that option. You can deduct the amount you paid for mortgage interest on both your first and second homes, and you can typically deduct your private mortgage insurance premiums.
The IRS does not allow you to deduct depreciation on your personal residence. You can't deduct the cost of utilities or wages you paid for domestic help. You can't deduct your settlement costs or closing costs, although you can add some of your settlement costs, including the cost of title insurance, to your home's cost basis. That will help reduce any capital gains taxes you incur when you sell your home. You can't deduct the premiums for your homeowners insurance, flood insurance, title insurance or any other type of insurance other than mortgage insurance.
The IRS gives you the option of itemizing your deductions or claiming the standard deduction when you file your federal income tax return. Most people use the standard deduction because it is easier, and in many cases, provides a lower income tax obligation. You must itemize your deductions if you wish to claim any of your homeowner expenses, such as mortgage interest and real estate taxes. The IRS recommends figuring your tax return using both methods, and then filing your return using the method that provides you with the greatest tax savings.
- new home 3 image by Kathy Burns from Fotolia.com