A house is an asset that can lower you tax liability. Take this into consideration when deciding whether or not to purchase a home...In many cases, mortgage payments plus associated real estate tax deductions, average out to be less than rent payments annually.
Some housing tax deductions and credits available to homeowners are:
1. Mortgage interest deduction- This deduction covers interest paid on up to $1 million worth of loans and is especially beneficial for borrowers with new mortgages since they pay more interest. Interest on first and second mortgages, home improvement loans, and home equity loans for primary and secondary (not rental) homes qualify for this deduction.
2. Mortgage points deduction - Homeowners may deduct state and local real estate taxes paid during the year. If a home sale occurs during the filing year, sellers pay for taxes up to, but not including, the day of sale. Buyers pay taxes beginning the day of the sale.
3. Private mortgage insurance (PMI) and Mortgage Insurance Premium (MIP) - Mortgage insurance premiums are added to mortgage payments when the loan's value exceeds 80% of the home's value. These premiums protect the lender if the buyer defaults. PMI payments have been tax deductible in recent years, however, this tax break isn't part of the tax code and Congress has to renew it for homeowners to deduct those costs. It has been renewed through 2016.
4. Mortgage prepayment penalty - You may have to pay a penalty if you pay off your mortgage early. You can deduct that penalty as home mortgage interest provided the penalty is not for a specific service performed or cost incurred in connection with your mortgage loan.
5. Late payment charge on mortgage payment. You can deduct as home mortgage interest a late payment charge if it was not for a specific service in connection with your mortgage loan.
6. Residential Energy Efficient Property Credit
- This tax credit is 30 percent of the cost of alternative energy equipment installed on or in your home.
- Qualified equipment includes solar hot water heaters, solar electric equipment, wind turbines and fuel cell property.
7. Home improvements - If you use a home equity loan or other loan secured by your home to finance home improvements, these loans will qualify for the same mortgage interest deductions as your main mortgage.
To get expert advice about tax deductions and credit you should contact your tax professional. You may also visit the IRS website to find out about tax breaks available to homeowners.