Buying a house in this red-hot housing market comes with tax perks for those who itemize deductions.
KNOW YOUR LIMITS
The interest you pay on the first $750,000 of acquisition debt is tax deductible. Acquisition debt is any debt used to acquire, construct or substantially improve a residence and is secured by the home.
Interest on acquisition debt for a second home may also qualify depending on whether you rent it out. If you rent your second home, you’ll also need to use it yourself. If you don’t use the home, it’ll be considered rental property with a different tax treatment. The rental property mortgage interest deduction also offers significant tax benefits.
LOOK AT THE DETAILS
If you take out a home equity loan, the interest may be deductible. You’ll have to look at the details of how the loan proceeds were used.
Suppose the proceeds were used to improve the house by remodeling the kitchen. In that case, the interest paid on the loan is deductible so long as the principal amount of the home equity loan and any other acquisition debt is below the $750,000 threshold.
But if you used the home equity loan to pay off student loans, for example, the interest isn’t deductible. Your tax professional can provide guidance for your situation.
Your house can provide you with more than just shelter. It can provide you with some significant tax breaks if you itemize deductions. Learn more about the most common tax deductions your home can deliver.
To be deductible, mortgage interest can be for your first and second home. However, only interest on $750,000 of indebtedness is deductible if your mortgage was taken out after December 15, 2017. There are similar limitations on older debt and if you rent your home out, there are use requirements that you must meet in order to deduct the interest.
You can pay “points” to lower your monthly mortgage payments. However, points are complicated, affect your taxes and too often, homeowners do not recoup their upfront investment. If you refinance, pay off or sell your home before you reach the break-even point, you will not regain your money. A good lender can help guide your decision.
For borrowers who pay mortgage insurance as part of their mortgage, the good news is that it can be deductible if the mortgage was obtained after 2006. And this deduction begins to phase out for adjusted gross incomes above $50,000 for single filers.
Most homeowners who itemize deductions will be able to deduct property taxes paid to their state and local governments. But the maximum amount of property taxes that are deductible is $10,000. The taxes must have been due and paid by the end of the year to be deductible. So, unfortunately, any prepaid taxes will be deductible in the year it was due, not paid.
Well-qualified borrowers may be able to get some very low mortgage rates on both purchases and refinance transactions. But the interest rate is only one of the factors to consider before you sign:
PRIVATE MORTGAGE INSURANCE
If your down payment is less than 20%, you may have to pay private mortgage insurance. This will add thousands of dollars to the cost of the loan.
FIXED VS. ADJUSTABLE
When interest rates go up your adjustable payment will increase accordingly. Fixed mortgage payments remain steady.
Fees are inevitable. In some cases, the seller may be willing to cover some or all of these costs.
You’ll need to cover homeowner’s insurance. And depending on location, you may also have flood, hurricane/windstorm, or earthquake insurance premiums.