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.

 

What’s in a Mortgage Payment?

money managementIf you are a first-time homebuyer, the prospect of buying a home is an exciting one. You are finally ready to say good-bye to your landlord and to have your monthly payment go to something you can call your own. But that monthly check covers more than just paying for your new abode. Here’s what’s included in your monthly mortgage payment:

Principal: This part of your mortgage payment goes toward paying down the balance of your home. If you have a fixed rate loan, this amount won’t change over time, but the percentage of the payment that goes toward principal instead of interest will increase over time. In the early years of your mortgage, you’ll pay a lot toward interest, but on the back end of the loan, the reverse is true.

Interest: Each monthly payment includes interest, or the cost of borrowing money. In a fixed rate loan, you will pay the same interest rate over the life of your loan. In an adjustable rate mortgage, that interest rate will fluctuate based on the market and according to the terms of your loan.

Taxes: In many cases, your lender will collect money toward your annual property tax bill and hold that amount in escrow until your taxes come due. Each monthly payment will include 1/12 of your annual property tax bill.

Homeowner’s Insurance: Your mortgage lender will collect 1/12 of your annual homeowner’s insurance premium with each monthly mortgage payment. Not all mortgage lenders will require this, but many do so they can ensure your interests – and theirs – are protected should something happen to your home.

Mortgage insurance: If you are making a down payment that is less than 20%, your lender may require you to have mortgage insurance to protect them should you default on your loan.

Have questions? An experienced Realtor® or mortgage lender can help!

Source: Realtor.com

 

 

 

 

 

 

Home Buyers: 10 Common Closing Costs

taxes 2When you’re planning to buy a home, you’ve already saved your down payment and maybe some money toward closing costs, but there are many costs that homebuyers don’t necessarily plan for, especially first-time homebuyers. Here are 10 common closing costs you should know about, compliments of the National Association of Realtors®.

  1. Earnest money. This is a 1 to 2% deposit you make to show that you are serious about buying a home.
  2. Escrow account. If you are putting less than 20% down, your mortgage company may ask for escrow to be sure you have enough money for taxes, mortgage insurance and other related expenses. Escrow is mandatory for FHA loans, and may be required by your lender for other types of mortgage loans.
  3. Origination fees. An origination fee compensates a mortgage lender or broker for its costs and services. It is usually around 1%, but this varies. When shopping for lenders, be sure to ask what they charge.
  4. Home inspections. Home inspections are an important part of the home buying process. Consider getting the entire home inspected as well as requesting specialty inspections like radon and pest inspections. Prices will vary.
  5. Attorney fees. Some states require an attorney at a closing. Though it is unnecessary in most cases, hiring an attorney can be beneficial in extreme situations.
  6. Credit report. You will likely have to pay the lender for ordering your credit report. Costs are typically in the $30 range.
  7. Additional insurance. If you are in a flood zone, you may be required to get flood insurance. Know the area where you are moving (or ask your Realtor®), so you can budget accordingly.
  8. Every home requires an appraisal to determine fair market value. Appraisals vary in cost, but typically range from $200 to $400.
  9. Title company. The title company charges a fee for doing a title search. Ask your Realtor® or lender for a referral.
  10. Occasionally, home buyers will want to hire a surveyor to determine where property lines are. Costs vary.

To estimate these costs, talk with your Realtor® and mortgage lender. Thanks to the NAR for this educational information!

 

 

10 Steps to Buying Your Dream Home

mortgage 2Are you ready to upgrade your starter home to one that will house your growing family? Or maybe you’re ready to buy the home of your dreams, complete with a master suite, 3-car garage, gazebo and hot tub? Realtor.com offers this 10-step guide to financing the perfect home.

  1. Get your finances in order to start your financial planning or to keep it on track.
  2. Find out how much money you’ll need to move out of your current home or apartment and into that dream home. Consider down payment costs, closing costs, moving expenses, utility deposits, etc.
  3. Check your credit score. Will you qualify for a home loan? If not, consult a loan officer to find out what changes you need to make, including correcting errors on your credit report.
  4. Discover your purchasing power. Based on your down payment, credit rating and income, you’ll want to find out how much home you can afford. Remember to include indirect costs too when calculating your budget – taxes, insurances, utility costs, maintenance, warranties, etc.
  5. Understand your mortgage payment. You’ll need to know how much you can expect to pay based on the price of your home, the interest rate, taxes and insurance.
  6. Learn your loan options. Talk to your mortgage broker or lender to find out what types of home loans are available and which best fits your situation.
  7. Prepare to make a fair offer. Your Realtor® can help you determine an appropriate and fair offer when you’re ready to commit to that dream home.
  8. Secure a home loan. Now that you’ve made an offer and had it accepted, you’ll want to turn that pre-approval into a home loan.
  9. Purchase insurance. Your home is one of the biggest investments you’ll ever make, so make sure that investment is properly insured.
  10. Seal the deal. Closing on your home is one of the most stressful – but also the most rewarding – parts of the home buying process. Ask your Realtor® and mortgage lender what to expect.

For more information on each of these 10 steps, visit Realtor.com or contact your local Realtor® who can walk you through the home buying process, step by step.

 

Owning a Home Can Save You at Tax Time

irs tax creditsI have good news and bad news. The bad news – April 15, tax time, is just around the corner. The good news – owning your own home can reduce your tax liability. Here are seven tax deductions that can save you money now!

  1. You can deduct home mortgage interest, up to certain limits, on Schedule A of your Form 1040.
  2. You may be eligible for deductions for discount points, loan origination fees or loan charges if you purchased or refinanced a home last year.
  3. Qualifying home mortgage insurance may be deductible.
  4. Local and state real estate property taxes are deductible on Schedule F of your Form 1040.
  5. If you sold a home last year, you may be able to deduct title insurance, advertising and real estate broker fees on your tax return.
  6. Did you move more than 50 miles for a job? A portion of your moving costs could be deductible. Certain limitations apply.
  7. Did you make energy saving improvements to your home last year? You might be eligible for a tax deduction or credit. Visit gov for more information.

For advice on your individual tax situation and eligible deductions, please contact your accountant. He or she can best advise you on which tax deductions apply to you.

Source: American Home Shield

HouseLogic: 9 Easy Mistakes Homeowners Make on Their Taxes

Avoid an IRS audit by recording homeowner tax deductions and credits properly.No one likes paying taxes. What’s even worse though is being audited by the IRS. A good way to avoid an audit is to be sure you understand home-related tax deductions and credits. Here are 9 common mistakes homeowners make, according to HouseLogic.com.

1.  Deducting the wrong year for property taxes

2.  Confusing escrow for the actual taxes paid

3.  Deducting points paid for refinancing

4.  Misjudging or miscalculating the home office tax deduction

5.  Failing to repay the first-time homebuyer tax credit

6.  Neglecting to record home-related expenses

7.  Forgetting to keep track of capital gains

8.  Filing incorrectly for energy tax credits

9.  Claiming too much for your mortgage interest tax deduction

To read more about these mistakes and how to avoid them, visit HouseLogic.com. Another good resource is your tax preparer, especially since the fiscal cliff has changed the tax landscape for 2012.

 

Knowing Your Home’s Value

Here’s a great article from loan officer Susan Lipston on Knowing Your Home’s Value. Read on for more info. on selling your home, refinancing your home, making home improvements and reassessing your taxes:

Knowing Your Home’s Value

Your home is one of your most important investments and financial assets, but do you know its value? If you hesitate to answer, don’t worry, you’re not alone. Even if you’re not trying to sell right now, there are other reasons that you may want to know your home’s market value. And knowing this number can help you move quickly when it’s time to make a decision about any of the following actions.

Selling your home.

There might come a time when you need to sell your home. You might get offered an out-of-state job opportunity, determine it makes financial sense to downsize, or need to look for a larger home if your family is expanding. If you are ready to buy another home, your current home’s value can narrow down your options for your new purchase, and I can show you the financing options that will be available to you. Knowing your home’s market worth would certainly help you make an informed decision, and put you in a position to more quickly respond.

Refinancing your home.

There are a number of reasons to refinance. For instance, you might be able to finally tap into current low rates, or you might desire better terms. You can find out if you will qualify for a traditional refinancing program or if you may be eligible for the HARP II refinance program, which allows homeowners who owe more than their home is worth to restructure their loans into more stable products with a lower rate. Until you know your home’s value, you won’t know how advantageous or disadvantageous a refinance would be from a financial perspective. I’d be happy to assist you in exploring whether refinancing makes financial sense for your unique situation.

Making home improvements.

While you might have mulled over how home improvements, such as a bathroom makeover, new countertops, or perhaps an addition, could improve your enjoyment of your home and mused at what additional value they might bring, you really don’t know until you’re aware of your home’s value. Check what other homes in your areas have sold for, and pay particularly close attention to any sold properties that had upgrades similar to or the same as yours in relation to those that don’t. Once you get an idea of what your home might sell for, you can see if the upgrades you are considering are worth the expense, or if you might want to go with a more cost-effective option.

Reassessing your taxes.

Your county assessor’s office reviews property values on a periodic basis, and makes adjustments based on a property’s market value. In a down market this can mean much lower property taxes. Being aware of your home’s value can put you in a position to anticipate changes and do some tax and financial planning accordingly. That said, many assessor offices only shift their regular assessments by a maximum amount or percentage of the previous year’s value. However, many states offer an appeal mechanism that can help you push for a lower reassessment to ensure an even more advantageous (and fair) property tax break. But the key is to know your home’s actual value and be able to document it.*

So, how do you determine your home’s value? Your first instinct might be to go to a popular website or download an app for online services that provide estimated real estate values. While these services might offer some instant gratification, they might not take in all the factors and trends that will give you the most accurate estimate of your home’s worth.

Especially if you are considering a move, the best option is to go to a real estate agent that has expertise in your marketplace. An experience professional who is familiar with the properties in your area and has been involved in numerous local transactions will have not only the tools and information but also the context and expertise to get a more accurate read on your home’s true market value. An experienced agent can bring insight into your local market and help you see opportunities that you may not have considered before. This also gives you the opportunity to find a trusted agent that you can work with when it’s time to buy or sell.