Home isn’t only where the heart is, it’s also where tax deductions reside.
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Home values may still be depressed, but homeowners can rely on some sizeable tax breaks. “It really pays from a tax perspective,” says Les Kramsky, executive vice president and general counsel to title insurance agency Silk Abstract Company. “You can really get great tax deductions.”
The amount of tax breaks depends on the size of your mortgage and your income bracket. In order for it to make financial sense to itemize home deductions, you must exceed the standard deduction, explains Bob Walters, chief economist at Quicken Loans. “If you have $110,000 loan and pay $4,000 in taxes and the standard deduction is $12,000 you’re not exceeding it. The bigger the loan the better.” For 2012, the standard deduction for married couples filing jointly is $11,900.
Exceeding the standard deduction when you own a home isn’t that hard to do. Here’s a look at some of the bigger deductions that can save you money come tax time.
When you take out a mortgage you agree to pay interest on the life of the loan. With the home mortgage interest deduction you are allowed to reduce your taxable income by the amount of interest paid on the loan each year.
“Mortgage interest is the biggest deduction for a homeowner,” says Kramsky. “It’s a big tax advantage for homeowners.” In order to get the deduction you have to elect to itemize deductions and they must exceed the standard deduction. For example, if you have a $500,000 home and are paying 4% interest, you’ll benefit by taking the mortgage interest deduction, adds Walters.
Property taxes are also deductible come April 15. If you live in a town where property taxes are in the double digits this should be a substantial write off. There has talk about eliminating this tax break, but proponents say it promotes home ownership. “In some towns property taxes can be $10,000, $20,000 or $30,000 a year. That’s a tremendous write-off,” says Kramsky.
The closing costs of buying a home can be hefty, but you are entitled to tax benefits on those costs for the year you paid them. One of those fees you can deduct is mortgage points. According to Kramsky, sometimes people will buy points when purchasing a home to lower their interest rate over the life of the mortgage. Those mortgage points equal a percentage of your mortgage and can be deducted. For instance, if you bought two points on a $300,000 mortgage that’s a $6,000 tax deduction. “If you know you are staying in the home for a while it pays to buy points to lower your interest,” says Kramsky. “You can turn around and write it off.” You can also write off any real estate tax you might pay at closing.
Many homeowners don’t have 20% to put down on their new home and because of that they are required to get private mortgage insurance, known as PMI. Those premiums use to be deductible, but not anymore, according to Kramsky. There is one caveat: if you took at your mortgage between the years of 2007 and 2011 you can deduct your PMI premiums even if you are paying them after 2011, he says.
While tax write offs are attractive, experts caution it shouldn’t be the primary reason to buy a home—it has to be the right fit for your lifestyle and budget. “Don’t let the tax tail wag the dog,” says Walters.