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Tax Planning

TAX BENEFITS OF OWNING YOUR PERSONAL RESIDENCE

TAX BENEFITS OF OWNING YOUR PERSONAL RESIDENCE

By – Scott Estill

Untitled

There are many tax benefits to owning your own home.  This short article explains many of the benefits and, like any other tax article I write, you should consult with your tax professional to ensure that any tax strategies you implement are appropriate for you.

PURCHASE EXPENSES

When you purchase your primary residence, you are permitted to claim as tax deductions the following expenses incurred at the real estate closing:

  • Mortgage interest you paid at the closing (will be on the settlement statement)
  • Points paid at closing. This is the case if each of the following is true:
  1. Your loan is secured by your main home.
  2. Paying points is an established business practice in the area where the loan was made.
  3. The points paid were not more than the points generally charged in that area.
  4. The points were not paid in place of amounts that ordinarily are stated separately on the settlement statement, such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes.
  5. You use your loan to buy or build your main home.
  6. The points were computed as a percentage of the principal amount of the mortgage.
  7. The amount is clearly shown on the settlement statement (such as the Uniform Settlement Statement, Form HUD-1) as points charged for the mortgage.
  8. The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. The funds you provided are not required to have been applied to the points. They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. You cannot have borrowed these funds.

TAX TIP: You (as the buyer) may claim a tax deduction for the points paid by either you or the seller.

TAX TIP: Any closing costs that you cannot currently deduct (including title and abstract fees, real estate commissions, tax stamps, credit, and other report costs, attorney fees, etc.) are not lost forever but instead are added to the purchase price of the home. This may be beneficial (from a tax perspective) when you sell your home in the future.

CURRENT EXPENSES

Here are some of the tax deductions you may be able to claim on your income tax return to reduce the amount of taxes you may owe to the IRS or your state revenue department:

  • Mortgage interest paid on the initial loan. There is now a cap of $750,000 (beginning in 2018) on the total loan amounts for which you are permitted to claim an interest deduction.  As long as the total of any first or second mortgages is less than $750,000, this limitation will not apply to you and all interest would be tax deductible.  If your total mortgage debt exceeds $750,000, you will not be able to claim all mortgage interest as a tax deduction.
  • Interest paid on a home equity line of credit. Note that the Tax Cuts and Jobs Act eliminated the ability to deduct interest on home equity loans unless the loan/line of credit was used to buy, build or substantially improve your qualified residence (main home/primary residence or second home) that secures the loan.
  • Mortgage insurance premiums.
  • Points paid to refinance a loan. These are claimed over the life of the loan so that you can claim only a portion of the points in any given year (such as 1/15 or 1/30 of the points for a fifteen year or thirty-year mortgage).
  • Points paid on prior refinance. If you have previously refinanced your initial mortgage and are paying points on that loan (over the term of the loan), you are permitted to deduct all remaining points in the year you do the second refinance.
Attorney Scott M. Estill is a nationally
Attorney Scott M. Estill is a nationally recognized and sought-after tax education speaker. He has spoken at numerous seminars, conferences, and conventions on many different tax-related topics (please see list below) since leaving his position as a Senior Trial Attorney with the IRS in January 1995. He has also appeared on numerous television, radio, and web-based interview programs since 1995, speaking on many different tax-related topics.
Over the previous 23 years, Scott has provided thousands of seminar/conference attendees with numerous real-world tax strategies that individuals, business owners, and real estate investors can implement to realize immediate tax savings and plan for the future.
  • Real estate and state/local property taxes. Note that there is a cap of $10,000 that can be deducted on any state or local property or income taxes.  This is new for 2018 as this cap did not exist in the past.
  • Home office. There are numerous tax deductions available when you operate a business with a home office, including claiming a portion of the utilities, repairs, maintenance, insurance, depreciation (and many others too numerous to list).
  • Health-related improvements.  Any home improvements for medical purposes can be deducted entirely from your taxes as long as the improvements do not add to the overall value of the home and have been made for a chronically ill or disabled person.

The following home-ownership expenses are NOT currently tax deductible:

  • Homeowner/hazard insurance premiums.
  • The amounts applied to reduce the principal of the mortgage.
  • Home Owners Association (HOA) fees.
  • Home improvements.
  • Depreciation of your personal residence.
  • Payments into an escrow account. You can deduct only the amounts actually paid for real estate taxes.  Other payments made into an escrow account may not be currently deductible (such as homeowner’s insurance payments included in the account).

IRS Publication 936 explains many of these concepts in more detail.  This can be found at www.irs.gov.

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