Did you know that Americans save about $300 billion in taxes annually from mortgage insurance deductions? In the United States, homeowners, who itemize their deductions, can deduct the interest paid on their mortgage balances up to $1 million (married and filing separately only up to $500,000). The interest paid on a home equity loan or second mortgage may also be deducted up to a loan balance of $100,000. The greatest tax benefit is felt in the first few years of the loan when the payments are comprised almost entirely of interest.
Private Mortgage Insurance
Homeowners who have less than 20 percent equity in their mortgage must typically pay for private mortgage insurance (PMI). PMI is deductible on personal residences and vacation homes, but not rentals. This deduction is only available if the head of household, married couple filing jointly, or single earner’s adjusted gross income is less than $109,000 (or less than $54,500 for married couples filing separately). Unless renewed by Congress, 2016 will be the last year that this deduction can be used.
Did you buy a new home or refinance this year? Lenders often charge points, or prepaid interest, in exchange for lower interest rates. A point equals one percent of the entire amount of the loan (i.e. on a $100,000 loan, one point would cost $1,000). If you paid points on a home purchase, they are deductible in the year they were paid. Points paid on a home equity loan or to refinance are deductible over the life of the loan.
If you itemize your taxes, your property taxes paid for the year are also deductible. If you have a mortgage, these property taxes are collected by the lender, impounded and paid on your behalf. The lender will typically send you statement showing how much property tax was paid so you know the amount to deduct.
Gains From The Sale of Your Home
If you have lived in your primary residence for two of the last five years, when you sell your home you are eligible for an exclusion on the profit gained up to $250,000 for an individual and $500,000 for a couple. This is an amazing benefit especially when values are increasing. The profit (or net sales gain) consists of the selling price less the purchase price, plus any improvements and selling expenses.
Second Homes/Rental Properties
Mortgage interest payments and property taxes are deductible on second homes and rentals. So, too, are other business expenses. Be sure to track all your expenses and check with your accountant for all the details.
Expenses You Can’t Deduct
On a primary residence, you can’t deduct homeowner’s insurance, appraisal fees for your home, or homeowner’s association dues. The cost of home improvements also cannot be deducted (expect in some cases where the improvements were medically necessary). Regardless, save your receipts, as they may be needed to calculate your net sales gain when you go to sell your home.
To the extent that this article concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. This message was written to support the promotion or marketing of the transactions or matters addressed herein, and the taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.