It’s tax time again, and for homeowners that means a lot of headaches and confusion about how to do your own taxes. This is particularly true for folks who made a first-time home purchase in 2015, and they aren’t sure what needs to go on their tax forms. But you don’t want to miss out on great tax deductions – especially in cities like Austin where taxes levied on property are high.
No worries! We’ll cover the basics on homes and taxes, including deductions on mortgage interest, home equity loans and points. We’ll also discuss qualifications and expectations for returns. Of course, we aren’t tax experts, so this advice is only meant to be a starting point. You should seek out a tax professional for actionable advice.
Home Financing Deductions
If you bought or already owned a home in 2015 (and you are the proud owner of a mortgage), odds are that your lender has what’s called a “security interest” in your home. This acts as a collateral for repayment which means, in simple terms, the lender keeps your title until the house is sold or paid off. Check the lender section of your mortgage documents to determine this.
If so, then you most likely qualify for a mortgage interest deduction. This means that any interest you paid on the house in 2015 can be deducted on your taxes. Since you pay a lot of interest on the first half of the loan and more principal on the latter half, you will have higher deductible amounts in the first few years.
There are a few aspects to the mortgage interest deduction that you may need to know about.
1. You can deduct mortgage interest on up to two residential loans. So if you have a vacation home and your main place of residence, both apply.
2. Despite this, you can only deduct the interest from up to $1 million worth of home financing. So if your home loan is worth more, or the combined vacation home and residential home loans are worth more, you cannot deduct the interest from the excess.
3. Homes don’t have to just be houses. Residences RVs and boats can qualify as long as you can cook food, shower and sleep in them.
4. Tread carefully with using RVs and boats as residences, as you must spend at least two weeks worth of time within them to consider it a vacation home.
Home Equity Loan Deductions
Say you’ve been a homeowner for some time, and you decided to use the equity in your house to get a home equity loan. We have some good news for you: you may also qualify for a deduction.
Not only can you deduct your standard mortgage interest payments, but you can also deduct any interest paid on your home equity loan up to $100,000. This also applies to home equity lines of credit.
Points are a very confusing, general term that is essentially prepaid interest on a home financing loan. For Austin residents, they may choose to pay points in order to lower their interest rates and offset those high property taxes.
Either way, the prepaid interest (points) in most cases is deductible. Points may also be paid on a home improvement loan, and those can qualify as well. There are a few other general guidelines for deducting points, though. Some of the more basic rules include:
- The points have to be literally labeled “points” on your settlement statement
- You cannot deduct all your points at once, but over the life of the loan.
- The points system has to be a regular occurrence in your area and the amount of points you paid can’t be higher than the norm in that region.
- The points were in addition to your other closing fees (like title fees, property taxes, appraisal fees).
- You cannot deduct all your points at once on your second home, or vacation home, but you can deduct them over the life of the loan.
There are a lot more rules for deducting home financing points, so be sure to speak with your tax advisor on what you do and do not qualify for.
You Can Do This!
Taxes are a huge drag, but it’s definitely worth spending the time going through all of your possible deductions to save as much money as you can. For first-time homebuyers and those who have not yet deducted their mortgage interest, remember to use 1040 Schedule A to itemize all of your expenses on the home, including your interest paid.
When you’re ready to refinance or get your first home equity loan, First Mortgage Solutions would love to be your expert mortgage guide!
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