Top 4 Real Estate Deductions You Need to Know.

Just like clockwork, tax season is here (eye roll). The good news is, if you’re a homeowner, this is your chance to lower the amount that will be owed by Uncle Sam. Claiming deductions in tax season can do wonders for reducing what’s due come April!

Common deductions:

• Mortgage Interest
• Property Taxes
• Mortgage Insurance Premiums

Why pay more than you need to? You can save yourself big time by knowing these three things. 

SIDE NOTE: You can itemize deductions or take the IRS standard deduction, but for sure, not both.

What are itemized deductions?

“Itemized deductions are only going to benefit you if you have enough things to itemize on your taxes versus taking a standard deduction,” Tax Expert Andre Poulos says. The standard deduction is $12,600 for married couples and $6,300 for singles or married couples filing separately. “if your itemized items don’t exceed those amounts,” Poulos says, “it’s pointless to do them because you’ll shortchange yourself.”

1. Mortgage Interest

Home mortgages are made, so a large amount you pay at the beginning of your loan goes towards paying down your interest, and a little bit of it goes towards your principal. The upside to that is you can deduct those interest payments on your primary and sometimes a second home-up to $1 million (or $500,000 if you’re married and filing separately). This is known as the most significant deduction on your tax bill as a homeowner. This applies to new purchases or new refinance mortgages, home equity lines of credit, and home equity loans, sometimes called second mortgages. It also applies to deductibles on home equity debt. Regardless of how you’ve spent, it applies to loans of $100,000 or less throughout the year (or $50,000 if you’re married and filing separately.)

File this work IRS Form 1098. It can add up to thousands of dollars for most homeowners. It reduces your taxable income, so you don’t owe as much, which is a significant benefit.

2. Points

If you bought a home in 2015, there’s another deduction you get; Mortgage Points. Most borrowers pay for points, which come in 2 forms: Discount Points, which allow you to repay some of your loan interest in exchange for a better mortgage rate, and the loan origination fee. One point is equal to 1% of your loan amount. A lot of homeowners overlook this deduction entirely, according to tax experts.

Example: You bought a home for $500,000 with a 1% origination fee. That is $5,000 you can itemize as a deduction on your taxes.
You can get a copy of your settlement statement from your lender, with the loan origination fee and discount points listed on it in January.

3. Property Taxes

This is a well-known perk of being a homeowner. It’s writing off your annual property taxes. You get to deduct these taxes in the year they’re paid, not the year they were due.

Your county’s property accessor’s office sends out a statement at the beginning of the year showing the amount of your property taxes.
REMINDER: If you bought a home and reimbursed the sellers for taxes they had already paid for the year, you’ll see that reflected on your settlement statement, not on your 1098.

4. Mortgage Insurance Premium

If you put less than 20% down when you bought a home, you’re likely paying a mortgage insurance premium.

The IRS treats this as mortgage interest that you can deduct on Schedule A of Form 1040. Although the overall amount of your premium can be counted as an interest deduction, it phases out for high-income earners. For instance, you can’t deduct your mortgage insurance premium if you earn an adjusted gross income of more than $109,000 or more than $54,500 for married couples filing separately).

Annnnndddddd last but not least all of the things you can’t deduct.

• Home & Title Insurance coverage (other than mortgage insurance premiums)
• Depreciation
• Utilities, such as gas, electricity, and water
• Most settlement cost (other than points)
• Forfeited deposits, down payments, or earnest money
• Home improvements paid via a private loan, cash, or credit
• Homeowners associate fee (unless it’s a rental property)
• Transfer taxes (stamp tax) in a personal home sale

Want more info on what you can and cannot do with a lot more details. Click here.

(I am not a tax advisor, please consult with your licensed tax expert)