Your Home Can Save You
Money!
Certainly not all costs related to your home are deductible. For example, unless
you use your home for business (e.g., you have an office in your home), costs
for insurance, repairs, utility costs, condo fees, etc., aren't deductible.
However, you generally will be able to deduct:
• REAL ESTATE TAXES
• HOME MORTGAGE INTEREST
Keep in mind, however, that home mortgage interest
deductions can be limited. Generally you can deduct
the interest from mortgages up to one million dollars
on a combination of your first and second homes
provided they were the original loans, as the principal
on these loans is paid down, the reduced loan amount
becomes the new limitation. If you were to later
refinance the home for more the remaining balance
on the original loan, the excess would have be
used for home improvements or qualify under the
provisions that allow a taxpayer to borrow up to
$100,000 in home equity. If not, a portion of the
interest would not be deductible.
The additional $100,000 of home equity can only
be borrowed from the primary residence and not
a second home. As a result, any equity taken from
a second home and not used to make improvements
on that home would create a situation where a portion
of the interest would not be deductible. When used
wisely the $100,000 equity loan can also be used
to finance other purchases where the interest expense
would normally not be deductible. An example of
this would be a personal vehicle.
Because of the current strict home mortgage deduction
limits, and the complicated tax rules associated
with this tax deduction, be sure to review any
home financing plans with your tax advisor before
finalizing loan deals.
Points:
A question often comes up about the deduction
for points on a home loan. Points are another name
for prepaid interest - they may be called loan
origination fees or some similar term. One point
equals 1% of the loan amount. When points are paid
for services a lender provides to set up a loan,
the points aren't deductible. However, when the
points are paid as a charge for the use of money,
the following rules apply:
• As a general rule, points ore only deductible
over the life of a loan. Say for example, you
paid $3,000 in points on a 30-year refinance
loon. Your tax deduction would be limited to
$ 100 a year ($3,000/30 years). If you decided
to pay your loan off early, say after 15 years,
you could write off the balance of the points
($1,500) in that year.
• An exception to the general rules lets
you deduct in full, points you pay in connection
with obtaining a mortgage to purchase, construct
or improve your main home.
• Seller-paid points can even be deducted
by a home buyer, but the amount deducted reduces
the home's basis.
