Home Ownership

Homeownership is a dream of many Americans. Interest rates may fluctuate, and economic circumstances may change, but owning a home remains an attainable goal. Americans have enjoyed an era of low interest rates and these, coupled with the economic stimulus package for new home buyers, make homeownership affordable for many. Homeowners deduct their mortgage interest if they itemize their deductions. Itemizing is generally more beneficial than taking the standard deduction. 

Home equity loan information

Many homeowners take out home equity loans to consolidate debts, make improvements to a home, or purchase a second home. Did you know that the interest on most home equity loans is tax deductible? There are limitations in deducting the interest based on what the loan is being used for.
  • The deduction only applies to interest from the loan for a first or second home. You are not able to choose which home is your primary residence. Your primary residence will be the home in which you resided for the majority of the year. You have the option of deciding which second home will qualify for the deduction. Each tax year, you may select a different second home based on which gives you the best tax advantage.
  • If you are consolidating your debts, you can deduct the interest on the first $100,000. The limits are higher (up to the value of the home or more) if you took the loan out to buy a second home or make improvements to your home.
  • If the loan was for home improvements, the interest deduction cannot exceed one million dollars. This includes the mortgages for both the first and second home combined.
Deductible interest is entered on your Schedule A and is available to taxpayers who are able to itemize. For more information about this deduction, ask your tax preparer.

Preparing to Buy

The process of buying a home can be overwhelming. The first step is to get organized, gather appropriate records and documents, and determine how much house you can afford. How much money will you have for a down payment? What amount can you afford to pay each month for the mortgage and home expenditures? Gather your past three years’ tax returns, your credit report, and other documents and you’re ready to start the pre-qualification process for a mortgage loan. Your loan officer will probably ask for two or three years of W-2 forms and current pay stubs, a two-year employment history, landlord references for two years, bank statements and credit card balances. Find out what information the loan officer needs before you go to your mortgage interview. 

Be familiar with the various types of mortgages. Comparison shop your local mortgage companies. There are conventional and adjusted rate mortgages (ARMs), as well as foreclosed homes. With the many options available, educated customers can apply their research to make their best deal. It’s wise to consult an experienced real estate agent for advice on the local market and various types of financing.

Documenting Your Home Purchase 

When is the best time to buy a home?  For tax purposes, the earlier in the year the better.  If you close on your home during January rather than June, you have the advantage of deducting more months of mortgage interest that first year.  Real estate taxes that are paid on your home are also deductible for the tax year. Your mortgage company will issue Form 1098, Mortgage Interest Statement, to list the tax-deductible mortgage interest and may also list real estate taxes paid for the year. This statement is mailed by January 31. Keep all tax information in a safe place so that you’ll have it when you file.

In most cases, homeowners are allowed to deduct all home mortgage interest paid on a loan made to secure a main home or second home.  The mortgage must be a secured debt financed by a mortgage or deed of trust on that property. The taxpayer must be legally liable for the loan, and file Form 1040, U.S. Individual Income Tax Return, along with Schedule A, Itemized Deductions.

Besides the mortgage interest, certain closing costs may be deductible, such as “points” paid by both the buyer and seller. Points are considered prepaid interest and are sometimes called loan origination fees. Generally, points are deductible over the term of the loan, but home buyers can deduct them in the purchase year if all of the following conditions are met: 
  • Taxpayer is legally responsible for the loan. 
  • Paying “points” is an established business practice in the area. 
  • Points paid are not more than are generally charged in the area. 
  • Taxpayer uses the cash method of accounting. 
  • Points were not paid for items such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes. 
  • Taxpayer provided funds at closing that were more than the amount of points paid. 
  • Loan is used to purchase or build main home. 
  • Points were figured as a percentage of the principal amount of mortgage. 
  • The amount is clearly shown on the settlement statement as points.  

Selling a Home

A home seller who is a single taxpayer may qualify to exclude, from their income, the first $250,000 of profit from the sale of a home he/she has owned and lived in for two of the last five years. The two years of ownership and occupancy do not have to be consecutive years. A married couple may qualify to exclude the first $500,000 of profit from income.