Category Archives: Taxes

What Homeowners Can and Can’t Deduct on Their Federal Tax Return

What Homeowners Can and Cannot Deduct on Their Federal TaxesOne of the many advantages to being a homeowner is the ability to deduct certain home-related expenses from your federal taxes. Here are some tax deductions and credits you’ll want to be sure to take advantage of when you file your 2016 federal tax return.

  1. Mortgage interest deduction. You can deduct mortgage interest paid annually. For singles, you can deduct interest on a mortgage up to $500,000. Joint filers can deduct interest paid on a mortgage up to $1 million.
  2. Deduction for interest paid on a home improvement loan. If you take out a home improvement loan, you can deduct the interest paid on that loan. There is no limit. However, there is a caveat – this deduction only applies to capital improvements made to your home, not to costly home repairs.
  3. Private mortgage interest (PMI) deduction. If you put less than 20 percent down, your lender likely required that you carry private mortgage insurance. Depending on your income, you may be able to deduct the premiums paid for PMI. Check with your accountant or tax preparer to see what the current year’s limits are and where you fall on the spectrum.
  4. Deduction for mortgage points. When you purchased your home, you may have paid mortgage points – or up-front fees – to get a lower interest rate. A point is typically equal to 1% of the total loan amount, so points can be costly. For example, a point on a $300,000 mortgage would cost $3,000. You are eligible for the deduction for the tax year in which you paid the points. If you bought a home in 2016 and paid points to lower your rate, you can deduct that amount on your 2016 federal tax return. If you refinanced a home or bought a second home, you may have to spread that deduction out over the life of the loan.
  5. Property tax deduction. Homeowners can deduct the amount of their property taxes on their federal income tax return. Your tax preparer can help you figure out the amount of the deduction which is not always straightforward because of how and when property taxes are billed and paid.
  6. Tax credits for residential and renewable energy efficiency improvements. If you made certain energy efficiency improvements (e.g., biomass stoves, air source heat pumps, insulation, etc.) to your primary residence in 2016, you may be eligible for a tax credit. Visit EnergyStar.gov for details.
  7. Home office deduction. Homeowners who have a separate home office that they use exclusively for business may qualify for a home office deduction. Visit IRS.gov for rules, restrictions and documentation required to qualify.

Here is a partial list of items you cannot deduct, courtesy of the IRS, publication 530:

  • Homeowner’s insurance premiums
  • The principal portion of your mortgage payment
  • Depreciation
  • Cost of utilities (e.g., gas, water, electricity)
  • Forfeited deposits, down payments or earnest money

We are not tax experts, however, so please talk with your accountant or tax preparer to confirm the deductions you are eligible for and what documentation you’ll need to provide to back up those deductions.

Sources: The Motley Fool, https://www.fool.com/retirement/2017/01/04/6-tax-deductions-homeowners-wont-want-to-miss.aspx

Energy Star, https://www.energystar.gov/about/2016_federal_tax_credits

IRS, https://www.irs.gov/businesses/small-businesses-self-employed/home-office-deduction

IRS, https://www.irs.gov/publications/p530/ar02.html

Homebuyers, Have You Saved Enough for Closing Costs?

Many homebuyers and home sellers believe they need at least a 20% down payment in order to buy a home or to move on to their next home. There are many loan programs where you can put down as little as 3% – or even 0% with a VA loan.

If you have saved up your down payment and are ready to start your home search, one other piece of the puzzle is to make sure that you’ve saved enough for your closing costs which include everything from homeowner’s insurance and title insurance to appraisal and legal fees.

Freddie Mac defines closing costs as:

“Closing costs, also called settlement fees, will need to be paid when you obtain a mortgage.  These are fees charged by people representing your purchase, including your lender, real estate agent, and other third parties involved in the transaction. Closing costs are typically between 2 and 5% of your purchase price.”

Many first-time homebuyers say they wished that someone had told them closing costs could be so high. If you think about it, with a low down payment program, your closing costs could equal the amount that you saved for your down payment.

Here is a list of just some of the fees/costs that may be included in your closing costs, depending on where the home you wish to purchase is located:

  • Government recording costs
  • Appraisal fees
  • Credit report fees
  • Lender origination fees
  • Title services (insurance, search fees)
  • Tax service fees
  • Survey fees
  • Attorney fees
  • Underwriting fees

Is there any way to avoid paying closing costs?

Work with your lender and real estate agent to see if there are any ways to decrease or defer your closing costs. There are no-closing mortgages available, but they end up costing you more in the end with a higher interest rate, or by wrapping the closing costs into the total cost of the mortgage (meaning you’ll end up paying interest on your closing costs).

Home buyers can also negotiate with the seller over who pays these fees. Sometimes the seller will agree to assume the buyer’s closing fees in order to get the deal finalized.

Bottom Line

Speak with your lender and agent early and often to determine how much you’ll be responsible for at closing. Finding out you’ll need to come up with thousands of dollars right before closing is not a surprise anyone is ever looking forward to. Want some guidance? My team can help explain the closing costs you might have to pay on the homes you are considering.

Homebuyer FAQs: Mortgage and Closing Costs

What You Need to Know about Mortgage & Closing Costs

Whether you are a first-time homebuyer or a seasoned homeowner ready for your next home, it is important to understand mortgage and closing costs. Here are some frequently asked questions to help you better understand your options.

Buying a Home: Homebuyer FAQs re Mortgage Costs and Closing CostsQ:  What factors impact a mortgage interest rate?

A:  There are many factors involved when determining a homebuyer’s interest rate including credit score, loan type, home price, down payment and mortgage costs (for example, points, mortgage insurance and closing costs).

Q:  What other credit-related factors are important when financing a home?

A:  The better your credit, the lower your interest rate for a home loan is likely to be. Mortgage lenders consider your overall credit score, but they also consider your credit history with them, the amount of debt you already have, how much money you have in savings, your total assets and your current income. Learn more about credit reports and scores here.

Q:  What are points?

A:  Also called discount points, points lower your interest rate in exchange for a fee paid at closing. When you choose to pay points, you pay more at closing, but you lower your interest rate and pay less for the home over time. Points are related to the loan amount, and one point equals 1 percent of the loan amount. For example, on a $200,000 mortgage loan, 1 percent of the loan amount would be $2,000. Points are listed on your loan estimate and on the closing disclosure.

Q:  What is mortgage insurance?

A:  Many lenders require mortgage insurance for borrowers who put less than 20 percent down on the purchase of a home. The mortgage insurance lowers the risk to the lender, making it easier for you to qualify for a home loan. The cost of the mortgage insurance is included in your monthly mortgage payment, increasing your monthly mortgage payment. The cost of private mortgage rates varies depending on the borrower’s down payment and credit score.

Q:  What closing costs will I have to pay?

A:  Closings costs, the amount of money you’ll need to pay when you close on the purchase of your home, vary. Sometimes these costs are paid out of pocket, but some lenders will roll these costs into the total loan amount of your mortgage. Certain closing costs may also be negotiated with the home seller and the home seller’s agent. Common closing costs include appraisal fees, title insurance, government taxes, tax service provider fees, and prepaid expenses (for example, property taxes, homeowner’s insurance and interest between the time of closing and the time your first payment is due).

For more information on interest rates, credit, points, mortgage insurance, closing costs and more, download this free home loan toolkit offered by the Consumer Financial Protection Bureau. It has some great information and checklists to help you through the home buying process. An experienced Realtor® can also answer these questions and guide you as you make decisions about buying a home.

Good luck!

Sources: Consumer Financial Protection Bureau

6 Homeowner Tax Credits and Deductions to Use in 2015

irs tax creditsThere are many advantages to owning a home versus renting one. One of the most significant reasons is the tax savings owning a home provides. As the year comes to a close, here are some tax savings eligible homeowners can use for the 2015 tax year.

  • Mortgage Interest Deduction. This is a deduction you will claim on Schedule A. To take advantage of this deduction, your mortgage must be secured by your home. Interest you pay on a mortgage is deductible when you use the loan to buy, build or improve your home. This interest can be deductible on a mortgage of up to $1,000,000, or $500,000 if you and your spouse are filing separately. If you take a second mortgage on (via a second mortgage, a home equity loan, or a home equity line of credit), that will count toward the $1,000,000 limit. See more on this deduction at IRS.gov.
  • Mortgage prepayment penalty. If you pay off your home mortgage early, you may have to pay a penalty. The good news is that you can deduct the penalty as home mortgage interest provided the penalty is not for a specific service performed or cost incurred in connection with your mortgage loan. See more on this deduction at IRS.gov
  • Property tax deduction. You can deduct real estate property taxes you paid at settlement or closing, or to a taxing authority during the year. Enter the amount paid on Schedule A. See more here.
  • Private mortgage insurance deduction. If you purchased your home with less than 20% down, you have to pay private mortgage insurance. This deduction was extended one more year, so if you meet the income limits, you can deduct the PMI you paid this year.
  • Energy tax credit. This is another tax credit that was extended another year. Homeowners are eligible for a tax credit of up to $500 if they make home improvements that save energy in their primary residences. Eligible improvements include things like replacing your roof, installing energy-efficient windows, or getting a new air conditioning system or furnace. Generally speaking, the credit is 10% of the cost of the improvements, up to $500, but of course, there are limitations.
  • Residential renewable-energy tax credit. In 2015, you may qualify for a federal tax credit for the purchase of certain geothermal heat pumps, small wind turbines (residential), solar energy systems and fuel cells. See EnergyStar.gov for details.

For more information on allowable tax credits and deductions, see the IRS’s 2014 guide for Tax Information for Homeowners. This will provide some guidance, but you’ll need the 2015 guide to help you prepare your 2015 guide. You will also want to consult your tax advisor to see which of the credits and deductions apply to you.