This time of year, people are thinking about their new year’s resolutions and beginning to get their taxes together for the April deadline. If you are renting or thinking about buying in the near future, there are many tax deductions that benefit homeowners that sometimes people don’t think about when weighing the benefits of renting versus owning:
Mortgage Interest Deduction – The interest homeowners pay to their lenders each year is deductible on mortgages up to $1 million. During the first several years of a loan, mortgage payments are interest-heavy which means the tax deductions for young mortgages can be substantial.
For example, for a median sales-priced home in the Tri-Cities ($212,300 as of October, 2013), the first 12 months of interest on a 4.6% loan can add up to $9,695. That interest can be immediately deducted from a taxpayer’s adjusted gross income, saving hundreds in tax liability for the first year alone.
Property Taxes – In states that have property taxes (including Washington State), those can also generally be deducted from the homeowners’ adjusted gross income. It is important to only include property taxes paid to the municipality – not to the lender as part of the escrow account.
Interest & Property Taxes on Second Homes – In many cases (depending on tax brackets and other IRS rules), the above two deductions can also apply to second properties. There are parameters to me met (such as the homeowner must stay at the home at least 14 days per year and it is not considered a rental property).
Home Equity Line of Credit Interest Tax Deduction – In the event a loan was secured against a home’s equity and the funds were used on “capital improvements” to a home, this interest may also be tax deductible.
Points for obtaining a loan – Points are usually a certain percentage of the loan and are either paid up front or over the duration of the loan. However, points are usually tax deductible over the duration of the loan period or in the year paid depending on if the loan is on a purchase or a refinance.
These deductions are presented as generalities only and you should confirm all eligibility with your tax professional. There are additional tax deductions that may benefit you if thinking about a purchase. If you have questions, Jennifer Cowgill can be reached at (509) 947-5670 or jennifer@referredrealestate.com or Jessica Johnson at (509) 947-2230 or jessica@referredrealestate.com.
* Above figures are based on 2012 tax table supplied by the IRS
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