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One of the many advantages of owning your own home is that the mortgage interest, real estate taxes, and points paid at time of financing can be deducted from your federal income taxes*.


Home Mortgage Interest

For your home mortgage interest to be deductible, it must be for a first or second mortgage, a home improvement loan, or a home equity loan.  The amount you can deduct may be limited if your mortgage balance is more than $1 million ($500,000 if married filing separately) or the mortgage was taken out for reasons other than to buy, build or improve your home.

 

Points

For a purchase loan, any points you pay are fully deductible the year you buy your home.  For a refinance, points are amortized over the life of the loan.  Either way, you will receive tax savings for paying points.

 

Real Estate Taxes

State or local real estate taxes are usually tax deductible. To qualify, the tax must be levied on the property's assessed value, the taxing authority must charge a uniform rate for properties in its jurisdiction, and the tax must not be for your special privilege but for the benefit of the general welfare.

 

Pre-Payment Penalty
Pre-payment penalties are considered pre-paid interest, and are therefore tax deductible.  When deciding whether to refinance out of a loan with a pre-payment penalty, the tax savings are an important factor in calculating the time it takes to realize savings from refinancing.

 

*The information contained in this article is for informational purposes only and may not reflect current tax year rules and regulations. You'll need to consult with your tax attorney, CPA, or the IRS for current tax year rules, restrictions, and regulations. 

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