[social]Owning a house can come with a lot of work. It can also have some benefits, such as being able to hang whatever you want on the walls; paint the kitchen black if that’s what your heart desires; or even get crazy and get a cat without having to pay a huge security deposit. However, the break that you get on your taxes is very alluring, too. Here are a few things to look forward to the first time you file taxes after purchasing your home.
One of the largest tax breaks that homeowners with a mortgage can take is the interest that is paid on the mortgage each year; unless your loan is over $1 million, at which point the IRS will cap your deductible interest.
You also get a tax break on interest from a home equity loan, or if you pulled money out via refinancing. The interest from either of those loans may be tax deductible if it falls within IRS guidelines. Equity debts of $100,000 or less can generally be deducted, but the amount that is still remaining on your first mortgage can affect how much you can claim.
You can also deduct mortgage interest on a second home, even if that “home” is a boat or RV; as long as it has cooking, sleeping, and bathroom facilities and you spend at least 14 days during the year in it. You can also rent out your second home and still get the full deduction, as long as you spend at least 10 percent of the number of days you rented it or 14 days, whichever is longer. So if you rent out your second home for 180 days, you will need to stay in the home for at least 18 days.
If you paid extra when you closed on your mortgage to get a lower interest rate, then you paid points, and it is tax deductible. However, when and how you get to claim the tax break varies.
The IRS will allow you to take a tax break on points in the year you paid them if, among other things, the loan is to purchase or build your main home; if it’s an established business practice in your area to pay points; and if the points are within the usual range. Points on a refinanced loan are also eligible for a tax break, but the deduction must be taken over the life of the loan.
Make sure your loan meets all the qualification requirements so that you can deduct points all at once. If the refinance frees up cash that you invest back into the house in improvements, then you can take the deduction in the year you paid the points. This rule also applies to home equity loans or lines of credit, as long as the money is used for work on the house used to secure the loan. If the loan is used for something else, the deduction is spread out over the life of the loan.
As with any tax advice, be sure to have a chat with a tax professional before making any decisions.