HOME OWNERSHIP

STILL A SOURCE OF INCOME TAX BENEFITS

Income tax breaks are probably one of the biggest reasons you decide to buy your home.  Home ownership can provide a taxpayer with several important tax benefits as briefly outlined below.

A.      REAL ESTATE TAXES.  You are generally able to deduct the real estate taxes paid on your home and on a second home, including the taxes paid through an escrow or impound account. 

B.      MORTGAGE INTEREST.  Interest paid on a first trust deed loan of up to $1 million used to acquire, construct, or substantially improve your main home or your second home are generally deductible.  Also, interest paid on a home equity loan (second trust deed) of up to $100,000 on a first or second home is also generally deductible, although it is limited to interest on the lesser of $100,000, or the difference between the fair market value of the property and the original amount borrowed at the time of purchase.

C.      LOAN ORIGINATION FEES.  Loan origination fees, also known as “points,” “loan discount,” or “discount points” that are paid by the purchaser, or by the seller, for a loan to acquire or construct a new primary residence are deductible in the year the loan is made.  Points paid to finance the purchase of a second home, or for a refinance loan must be amortized over the term of the loan.  Loan fees for a home equity or home improvement loan are immediately deductible only if the funds are spent on improvements, otherwise they must be amortized over the life of the loan.  If a loan is paid off prior to its maturity, any unamortized points can be claimed as a deduction in the year of the payoff.  VA and FHA prepaid mortgage insurance do not count as points. 

D.      HOW DO THESE DEDUCTIONS IMPACT MY TAXES.  A taxpayer in the 28% federal tax bracket and the 4.63% state tax bracket receives a tax reduction equal to $32.63 for each $100 paid for mortgage interest and real estate taxes on any of these amounts that exceed the standard deduction available to the taxpayer.  See item F below. 

E.      DEDUCTION LIMITATIONS.  There are a number of limitations that may effect the deductibility of real estate taxes, mortgage interest, and points.  Tax regulations limit the amount of certain deductions based upon the level of income.  Taxpayers with annual income exceeding $126,000 may be subject to limits on itemized deductions.  There are rules regarding married couples filing separately that may also impact the amount of the deduction claimed. 

F.       OVERALL ITEMIZED DEDUCTION AMOUNTS.  If the total paid for mortgage interest and real estate taxes, when combined with a taxpayer’s other itemized deductions, does not exceed the standard deduction allowed, then the larger standard deduction can be claimed.  In this case, there is no additional tax benefit for the mortgage interest paid.  In such a case, a taxpayer that has invested funds on which the earnings are creating taxable income should consider paying down or paying off the balance of the mortgage since no tax benefit is being achieved.