What Really Is Tax Deductible for New Home Owners?

Everyone is always reminding potential buyers about all of the tax advantages that come with home ownership. For instance, a homeowner can deduct mortgage interest, property taxes, and points used to obtain a mortgage. Yes, these things are true, but most people do not realize the guidelines to such deductions, and as a result many people are caught a little off guard when tax time comes around.The first question to answer for most people is "what are points anyway?" Points are an expression of the loan origination fee. This fee is part of the cost of getting a mortgage. One point on a $200K loan would be $2,000 (or 1 percent). There are also discount points, which are a percentage of the balance of the loan. Both of these kinds of points are considered tax deductible by the federal government, however deductions on loan origination fees will only be considered if they are expressed in the value of points.Points are deductible only in the year that they are paid. The mortgage must be secured with the home of your current residence and this home must be used for the actual purchase of the home. If your points are higher than average, but you end up not having to pay the insurance fees, property taxes, settlement fees, and other various fees that are associated with home buying, you might not be able to deduct those points. The money that is put into buying the home must be more than the amount of points. Lenders can inflate the loan so that it covers your points, but in this will make a "points" tax deduction impossible. Other than this, as long as the points are clearly stated on the HUD1 Settlement Statement received from closing, there should be no problem submitting those for tax deduction.If the points are paid for by the seller, the buyer can still deduct them. When a seller pays the buyers' closing costs, this reduces the net gain of the home for calculating capital gains tax, so the seller will not claim the closing costs. Second home deductions must be done over the life of the loan, rather than the year in which they are paid.Almost all other closing costs (besides taxes and loan origination fees) are not tax deductible. Pre-paid interest and pro-rated property taxes are the few exceptions. Most mortgage brokers want to see the loan close at the beginning of the month to make you pre-pay the interest for the remainder of that month. Though this is more money up front, all of this pre-paid interest and all future interest is tax deductible.It is good to do your own research so that you really understand the loan process as well as all of the things you can claim as tax deductible, and it is important to keep track of these things so that you do not forget to report them. There is no use in paying more taxes than you really owe. Though tax deductions alone are by no means reason for buying a house, you should take advantage of what breaks you can get.

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