Among the numerous benefits of home ownership are some nifty tax deductions. If you took out a mortgage to purchase your home, you can write off the mortgage interest you pay. Your state and local real estate taxes are also tax-deductible. But a number of the costs associated with buying a home, including your down payment, are not tax-deductible.
Your mortgage down payment is a cash payment you make to the mortgage company that reduces the amount of the mortgage loan relative to the purchase price of the home. The down payment represents your initial equity in the home. For example, if you purchase a $200,000 home, and make a $50,000 down payment, the mortgage company would lend you the remaining $150,000. You would have $50,000 worth of equity, or ownership, in your home. You cannot deduct any portion of your house payment that reduces the principal amount of the mortgage, so none of your down payment is tax-deductible.
Non-Deductible Settlement Costs
In addition to your down payment, there are typically other upfront costs associated with buying your home. These costs are commonly referred to as settlement costs or closing costs, and are sometimes divided between the seller and the buyer, depending on the sales contract. Most settlement costs, such as transfer fees, survey fees, title insurance, recording fees and other legal fees are not tax-deductible, but you can usually add those expenses into the cost basis of your home. That will at least reduce the amount of any capital gains taxes you might have to pay when you sell your home.
Real Estate Taxes
State and local real estate taxes are deductible in the year they are paid. When you buy a home, the real estate taxes on the property for the year are typically divided between the seller and the buyer based on how much of the year each party will own the property. You can deduct any property taxes you pay on your home at closing, with a couple of caveats. Your property tax payment must be due, you must owe it and it must actually go to the taxing authority. If your property tax payment goes into an escrow account, to be paid to the taxing authority after the end of the year, you can't deduct it on the current year's taxes.
Mortgage interest you pay at closing is tax-deductible. The Internal Revenue Service considers points you paid to the lender in order to secure your mortgage to be a form of deductible interest. The amount of the points must be customary in the region where you bought your home, and the amount of your cash down payment must be equal to or more than the amount you paid in points.
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.