Year’s end is a great time of year to purchase your first home, move to a more desirable neighborhood or school district, or for those empty-nesters, down-size to a more manageable home. In addition to locking in low interest rates, buying a home before the end of 2016 could reduce your tax bill and save you money.
1. Mortgage Interest
If you close by December 31, you can deduct all mortgage interest you paid in 2016. You must itemize your deductions to claim a mortgage interest deduction. This requires you to use Form 1040 to file your taxes, and Schedule A to report your itemized expenses. The interest payments and points you pay are combined with all other deductions you claim on Schedule A; the total of which reduces your income that is subject to tax on the second page of your tax return.
2. Mortgage Points
Mortgage discount points, also known as prepaid interest, are the fees you pay at closing to obtain a lower interest rate on your mortgage. These costs are usually deductible in the year that you purchase the home; but if not, you may still qualify to deduct them over the life of the loan. For example, if you pay $3,000 in points to obtain a lower interest rate on your mortgage, you can increase your mortgage interest deduction by $3,000 in the tax year you close on the home. Use Schedule A of IRS Form 1040 to itemize the deduction.
3. Property Taxes
Also known as real estate tax, you can deduct this tax for your primary residence, land, vacation home – even if it is located on foreign property. If the home you are buying will be a rental property, you can claim the tax as an expense. This tax must be claimed as a deduction in the year you made the payment. Depending on your City and County, if you by a property before the end of 2016, you may not be paying property tax until 2017. However, if you paid a portion in your closing costs you can claim that amount on your 2016 taxes. Look for a “real estate tax” or “property tax” charge on your settlement statement.
These tax deductions can have a significant impact on reducing your tax return, especially in the early years of your loan when you’re paying off a lot of interest. Please check with a tax professional for advice and to ensure you are itemizing all of your deductions correctly.
To get expert advice on your lending pre-qualifications for your new home purchase, contact to us today!