I have worked with a lot first time home buyers and have educated many of them about the tax advantages of home ownership. In my discussion with them I inform them that there are two sets of tax deductions that they need to consider when they purchase a new home. The first set of deductions has to do with buying the home and the second has to do with refinancing the mortgage once they have been in the home for a while. This article will discuss only the taxes advantages relating to refinancing. Go to our article: Tax Deductions - What tax savings apply when I buy a home for more information.
Mortgage Interest Paid On Your Primary Residence Home Loan
This section applies to your first mortgage only. If you have a mortgage on your home, then you pay mortgage interest and principal to your mortgage company every month. If you have an interest only mortgage then you only pay mortgage interest every month. At the end of each year, your mortgage company will send you a tax form called a "Form 1098" that you will submit with your annual tax return to the IRS, and in some states for your state taxes too. The end result of this is that your tax that you owe will decrease or the amount of money that you will get back in a refund check will increase. If you use a tax preparer for your taxes then they will want this form to get your mortgage interest paid over the past year. If you do your own taxes, do not forget to take this deduction; it will help.
Mortgage Interest Paid On A Second Mortgage
If you have a second mortgage on your home, in general, any interest paid annual on the loan is deductible if it is less than $100,000 and the total combined loan amounts (adding your first mortgage loan amount and your second loan amount together) does not exceed the value of your home. The only time that you can write off some of the second mortgage interest when your combined loans amounts are greater than the value of your home is when you can prove that the loan money was used for home improvements.
Property Taxes Paid To Your State and Local Governments
Again, in general, property taxes paid to your local, city and state governments are tax deductible if they are based on your home's assessed value and everyone around you is also paying property taxes. Briefly, assessed value is the local governments estimate or opinion of the value of your home. In most cases, this value is actually lower than what your home is really worth. The assessed values are low because the inspectors who do these inspections typically don't enter your home to inspect, so they essentially guess low to compensate for the condition of your property.
You might not know your annual property taxes because your statements might get mailed directly to your mortgage company. For tax purposes you need to know these figures. It is real easy to find them online at your county assessor's office (a quick google search will land you there real quick). A second easy place to find them is on your monthly mortgage statement. If you are paying escrows or impounds then you'll see associated with these figures an amount paid for your property taxes. These taxes are normally paid twice a year, once in the fall and once in the spring. Some places have you pay annually.
You Can Deduct Points Over The Course Of The Loan
The last general deduction that you might be able to make is associated with the 'points'; you paid when you purchased your home. If you paid 'points' or origination fees or discount fees or a mortgage broker fee you can deduct some of these fees annually for the life of the loan for as long as you have it in place. For example if you paid $3,000 in points and you have a 30 year mortgage, then what is deductible is $3,000 divided by 30 for $100. This is the amount you can deduct annually on your taxes for your points. There might some additional tax deductions if you did a cash-out refinance and some of the money you got for cash-out was for home improvements. Speak to your tax advisor about this if it applies to your situation.
That's it in a nutshell. There might be some additional tax deductions available, please see your tax preparer. They will know the applicable tax rules to your return.
Written by Dale Stouffer, Mortgage Broker not a tax adviser. The information found in this article is based on experience in the mortgage industry and working with tax preparers to answer questions for his clients. This article is not intended to provide tax advice. Please consult your tax preparer additional and specific tax guides.
