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Tax Deductions for a home buyer - The benefits from buying a home
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If you are reading this article and you haven’t already read: Tax Deductions for a homeowner – benefits of owning a home versus renting then I encourage you to read that one too. It is part 1 or part 2 of this article, depending on how you look at it. This article covers the tax incentives you receive when you purchase a home.
In my article, Tax Deductions for a homeowner – benefits of owning a home versus renting, I cover the ongoing tax benefits of homeownership. Here I cover the benefits you receive from the IRS when you purchase a home.
As a mortgage broker, I have a passion for this first category of tax benefits – “Points”. Please allow me to discuss briefly points and what they mean in terms of your mortgage. When I’m done with this, I’ll get right back into the tax benefits associated with purchasing a home.
What are Points? A “point” is 1% of the loan amount so for example if you were borrowing $200,000 then one point would be $2,000. Points, in combination with the interest rate you get, are a part of how myself or loan officers (aka mortgage consultants etc.) get paid. If you are charged points, then your loan officer typically gets paid directly from the money paid in points. Also, if you are charged points then in theory you should have a lower interest rate than if you hadn’t paid any points. In most loans that I close for folks, I don’t charge any points. If you need a lower payment or rate from what I quoted, then you’ll end up paying some sort of point so that I can still make some money for working with you.
Another way to say “points” is to say: origination fee, mortgage broker fee, loan origination fee, and loan discount fee. Any way you slice it, if you see these items with a number beside it on your loan paperwork, chances are you paying points and you should get a lower interest rate. Ask what the interest rate would be if you weren’t paying some version of this fee and see what they say. If they say, no higher rate, then ask, “why am I paying the fee aren’t you making money on the interest rate you are charging?”
Okay, back to the tax benefits discussion. Typically, the points you are charged when buying a home are fully tax deductible in the year that you purchase your home. Incidentally, this only applies to the home that you buy to live in, or that you refinance that you already live in. If you pay points for a second home, then those points are tax deductible over the course of the loan term.
One thing that you might see is when a lender charges a larger origination fee, or points, and then not charge you the other closing costs like title insurance, appraisal fee, settlement fees, taxes etc. If this happens, you will most likely not be able to receive any tax benefits from the points because the IRS isn’t stupid, they know that you had to pay these fees some way. The IRS will add things up and make sure that your deduction is comparable to what you would have really paid if you had covered these fees normally.
There are several other items that offer tax deductions for the buyer on a purchase transaction. The first is directly applicable to you the seller is paying your points as part of the deal you negotiated with them. This figure is tax deductible for you, but unfortunately not for the seller. Where the seller gets their tax break is from a reduction in the profit, or capital gains, they make on selling the property. Another tax consideration in your favor is the pre paid interest that is paid during your home purchase. This item is often called, interim interest. Interim interest is the interest due from the time you settle your loan until the end of the month. The last item of particular interest is property taxes that you might recoup the seller at the time of your settlement. Often, property taxes are paid ahead, and if so, the seller gets them back at closing from you. You can deduct this amount too.
Okay, that’s about all of the general tax deductions you’ll get to take advantage of when purchasing a home to live in. The best advice I can give you is check with your tax advisor. My knowledge is from the years of experience I have had working with tax folks and their customers. I’m not a tax guy.
Written by Dale Stouffer, Mortgage Broker. Dale is a mortgage broker, not a tax advisor. This article is collection of his thoughts and understanding of the tax deductions that are relevant to his industry. For real advice and answers about tax deductions for home ownership, please contact your tax preparer.
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