January 28, 2014
I Just Bought A House!
I just bought a house! What can I deduct? This blog post will clarify how home ownership might reduce your taxable income and lower your taxes.
You may know that there are significant tax advantages to owning your own home. However, these benefits are often confusing to homeowners! The rules are constantly changing; and there are many variables that impact the different benefits. This blog post will clarify how home ownership might reduce your taxable income and lower your taxes.
There are two ways to lower your taxes – deductions and credits. A deduction is something you can subtract from your gross income to arrive at your Adjusted Gross Income (AGI), to which the IRS will apply a tax rate to calculate your income tax. The more money you can deduct from your gross income, the lower the amount of taxes you will owe. However, if you are on the upper end of the income scale, your itemized deductions may unfortunately phase out (for taxpayers with AGI over $250K [single] or $300K [joint]).
Several items related to home ownership (primarily mortgages) are deductible from your gross income on your Schedule A tax form, including:
- Mortgage interest on a loan secured by your main home or second home – this is generally true for most mortgage interest, however the type of debt (grandfathered debt vs. home acquisition debt vs. home equity debt), the date it was incurred (pre or post 10/13/1987), and the amount ($1 million for home acquisition and grandfathered debt; and $100K for home equity debt), could reduce this deduction.
- Late payment charges on qualified mortgages.
- Mortgage prepayment penalties.
- Prepaid Interest/Points – this may be spread over the years to which it applies (depending on various factors), requiring an IRS worksheet to be completed in order to make this determination.
- Mortgage Insurance Premiums (in years 2007 to 2013 as of the date of this post) – these premiums must be in connection with home acquisition debt. For non-conventional mortgages such as VA, FHA and USDA-RD loan products, these might be called “funding fees” or “guarantee fees.” All of these are fully deductible. Prepaid mortgage insurance premiums are also deductible, however the year in which you can take the deductions is restricted by the IRS, depending on whether it is private mortgage insurance, or a VA or RD loan product. Unfortunately, if a taxpayer's AGI is more than $100K ($50K for married filing separately), then the deduction is reduced. If the AGI is more than $109K ($54K for married filing separately), then the deduction is completely eliminated.
- Property Taxes – taxpayers can deduct property taxes paid (on real estate and other property, sometimes including automobiles, depending on the state) on their Schedule A form. When selling a home, the seller can deduct the prorated or paid property taxes shown on the HUD-1 closing statement. Buyers of new homes cannot deduct property taxes for which they received a credit at closing.
There are several items which some homeowners/real estate professionals mistakenly believe are deductible from gross income on your Schedule A. The following items are not available as itemized deductions:
- Special Assessments – these are charges usually made by the local government for repairing/building a shared asset in the neighborhood, such as sidewalks.
- Transfer Taxes (Stamps) – these are taxes that are generally incurred by the seller in a home sale, and are based on the sale price of the property.
- Recording & Legal Fees – the cost for the buyer to record the deed to a new property, and the legal fees associated with purchasing a house, like the title opinion (in Iowa), are not deductible.
- Homeowners Association Fees (HOAs) – some communities charge each homeowner a fee for the maintenance of common spaces, which are not deductible on the Schedule A form.
That about sums it up for home-related tax deductions. Check in with me when I release my next blog posting on home-related tax credits (part 2 of 2)!