When Buying a home, Uncle Sam plays a big role, offering a variety of tax breaks for homeowners. But taxes are messy and they can be complicated and arcane. So learn all about the benefits, the pitfalls and how to file the paperwork properly.
More than 75 years ago, the US goverment decided to award homeowners with a lucrative tax break, permitting home loan interest to be deductible from personal taxable income.
This benefit is perticularly useful to first-time homebuyers because during the first years of the loan most of each monthly payment goes to pay interest, which is deductable. Very little principal is paid back. The longer you pay on an amortized loan, the more of each monthly payment goes to pay the principal. Less of each monthly payment goes toward interest. You lose some of your interest write-off as you build equity in the property.
What Is Deductible?
* Interest on your mortgage, whether paid to a lender or to a homeseller or another party, as long as it is for debt secured by real property.
* Property taxes are completely deductible, but special government fees such as water or sewer assessment may not be.
* For a Purchase mortgage, loan points are fully deductible in the year that they are paid. In a refinance, the points are written off in increments over the term of the loan.
What Is Not Deductible?
* Closing costs other than prorated property taxes and points on the loan
* Real estate commissions
* Home inspections, appraisals or loan application fees
* Homeowner and co-op dues
* Insurance expenses.
The longer the term of the mortgage the higher the tax savings, because there is more interest on a 30 or 40 year loan than there is on a 15 year mortgage. The higher the amount of interest paid, the larger the tax deduction. However, even if you take the tax savings into account, a 15 year loan will probably cost you less in the long run.