What Can You Write Off When Buying a Home?
The days of signing on the dotted line and moving into a new place with zero out-of-pocket cash are not part of the current landscape. Lenders require down payments and closing costs, which can take a chunk of your personal savings. However, the Internal Revenue Service lets you write off certain closing expenses when buying a house. These deductions lower your tax liability, but write-offs aren't limited to buying a house. You can also take advantage of deductions that benefit you as a homeowner as long as you own the house.
You will commonly pay mortgage points -- with each point representing 1 percent of the mortgage amount -- either because they are part of the loan charge or because you want to pay money upfront to reduce the mortgage interest rate. These two types of points are known as loan origination points and discount points. The loan origination is a flat fee charged by lenders to cover the administrative costs of processing a home loan. This fee is typically 1 percent of the purchase price, or one point. For example, if you are buying a $200,000 house, your lender may charge a loan origination fee of $2,000. Discount points are fees paid to your mortgage lender to buy down or reduce the interest rate on the loan. Discount points are also equivalent to 1 percent of the loan, and each discount point paid typically reduces your mortgage interest by .25 percent. You pay mortgage points at closing, and in most cases, the cost of points when buying a house is fully deductible on your taxes. To take the deduction, the mortgage loan must be secured by your home, the points paid cannot exceed what's typical for your area, and your down payment must be enough to cover the points. You can also deduct mortgage points paid by the seller.
Before filing a tax return for the year you bought your house, check your settlement or closing statement to see if you reimbursed the seller for any prepaid property taxes. This sheet describes the real estate transaction and shows the allocation of funds. If you reimbursed the seller at closing for prepaid taxes, you can deduct this amount on your tax return. A deduction for property taxes continues while you own the house. If you established an escrow account with your mortgage lender, your lender will send you form 1098 at the beginning of each year that states property tax payments during the previous year. If you didn't set up an escrow account but made payments directly to your government entity, keep accurate payment records to claim your deduction.
Every mortgage loan borrower pays interest to his mortgage lender for the life of the loan. This is the fee charged by lenders for the use of money to buy a house. Lenders apply a percentage of each mortgage payment to interest. Yearly interest payments can amount to thousands of dollars. When you own a home, these payments are tax-deductible. This deduction reduces your taxable income and therefore how much you owe in taxes. Each January, your mortgage lender will mail tax form 1098 to you. This provides a record of mortgage interest you paid during the preceding year. You can claim this deduction on Schedule A of your tax return. You can only deduct mortgage interest on a home loan up to $1 million if you're married and filing jointly. If you're married and filing separately, you can deduct mortgage interest on a home loan up to $500,000.
Owning a home also opens the door to energy-efficient tax credits. If you make energy-efficient improvements to a newly built home or an existing home, you can receive a tax credit equivalent to 30 percent of the cost. Improvements eligible for this deduction include the installation of a geothermal heat pump, solar panels and small wind turbines. Rental properties do not qualify for this deduction. This tax credit was set to expire on Dec. 31, 2016.
Valencia Higuera is a freelance writer from Chesapeake, Virginia. She has contributed content to print publications and online publications such as Sidestep.com, AOL Travel, Work.com and ABC Loan Guide. Higuera primarily works as a personal finance, travel and medical writer. She holds a Bachelor of Arts degree in English/journalism from Old Dominion University.