Buying a home makes a lot of sense because of the built-in tax breaks that accompany homeownership. To take full advantage, it’s usually necessary to itemize your taxes, and while this may seem like an unnecessary hassle, the benefits are well worth it. Here are six tax breaks every homeowner should know about.
- Mortgage Interest Deduction—Since the bulk of your monthly mortgage payments are applied towards interest at the beginning, a Mortgage Interest Deduction (MID) allows you to deduct what you pay from your taxes. Your lender will issue Form 1098, and it’s important that you keep it with your tax records. This form shows what you’re entitled to deduct and is your proof should you be audited by the IRS.
- Mortgage Insurance Premiums—If you have a mortgage with a loan-to-value ratio that is higher than 80%, you are required to carry private mortgage insurance (PMI) to protect your lender against default. But did you know that if your AGI is less than $100,000 for married couples, you might be able to deduct what you paid?
- Energy Star—It pays to install energy-efficient fixtures in your home, as they can offer you another tax deduction. To qualify, you must install items like energy-efficient windows, doors and skylights by the end of the year. Tax credits equal 10% of the product costs, assuming you meet the criteria. Installation costs are not tax-deductible.
- Points—If you paid fees to obtain a mortgage, you can deduct these charges in the year you paid them if the loan was for a primary residence. For refinances, you can deduct the points over the life of the loan.
- Property Taxes—Homeowners with property taxes that are based on the assessed value of their real property can deduct state and local property taxes. If you pay out of pocket, you will need to keep track of your bills. However, if you pay through an escrow account, the information will also appear on Form 1098.
- Construction Loan Interest—If you’re remodeling your home and take out a construction loan, you may be able to deduct the interest. This deduction is only available for the first two years of the loan, despite the length of time it takes to complete your construction.