Tax Break Low Down: What Every Homebuyer Should Know
Tax season is just around the corner. As a title company, we’ve become quite familiar with closing and ongoing costs of homeownership that may entitle you to some tax relief.
Below are some of the most common tax breaks homebuyers can take advantage of. If you closed with us, we can provide another copy of your settlement statement for tax purposes upon request. Consult a tax professional for further guidance.
This is usually the largest tax break for homeowners. If you purchased your home after December 16, 2017, interest can be deducted up to $750,000 of your mortgage debt if you are single, or married and filing jointly ($350,000 if you are married and filing separately).
Mortgage (or Discount) points
Some lenders will charge mortgage points, also known as discount points, to provide a lower interest rate. One mortgage point equals 1% of the total mortgage amount. These points can be included in your deductions.
Note: there could be a limit to this deduction if you borrowed more than $750,000 for your home.
Mortgage points deductions differ for a newly purchased home compared to a refinanced home. If you purchased a home and paid for points, these points can be deducted on that year’s tax returns.
However, if you refinanced and paid for points, the full deduction cannot be taken on that year’s taxes, but spread out over the duration of your mortgage.
If you paid for “loan origination points,” these are not the same as “mortgage points.” Loan origination points are a lender’s fee for providing your mortgage loan. Loan origination points are not eligible for a tax deduction.
Home equity loan interest
If you have a home equity loan, deductions can be made if you used the loan for significant home improvements or a second mortgage. Deductions will not be allowed if the home equity loan was used for bills or student loans. Home equity loans count toward the limit for deducting on mortgage interest.
Deductions can be made on state and local property taxes with specific limits depending on marital status. Married homeowners filing jointly may deduct up to $10,000. Single or married homeowners filing separately may deduct up to $5,000.
Bonus Tip: If your property taxes were collected and paid as part of your closing, these taxes will likely not be reported to you the January following your closing. Check your settlement statement to see if you paid property taxes at your closing. These may have been paid as part of a tax pro-ration or as a line item paid directly to the county or state.