Mortgage Tax Deductions
Often when considering purchasing a home, one of the things that intrigues potential homeowner’s is the right to be able to claim mortgage tax deductions. There are a number of deductions that are available including interest payments, points and some closing costs. What is not always evident however, is what must be done in order to claim these deductions and when they might be most beneficial.
Prepare for additional paperwork
One of the first things that a taxpayer will need to do to take advantage of mortgage tax deductions is to prepare to itemize deductions. The most significant opportunities for deductions come in the early phases of a mortgage, especially during the first five years. This is because this is when the most interest is paid and also when a new home buyer can deduct points and closing costs. This will require filing a Form 1040 as well as a Schedule A for federal tax filings.
Understanding who can deduct interest payments
Interest payments can only be deducted by the person who is legally obligated to pay the mortgage. When a property is owned equally by two or more non-spousal taxpayers, each of them may claim one half of the interest payments on the mortgage. It is also critical to note that the mortgage company should have issued a Form 1098 with the full amount of interest paid and if this is the case, then copies should be attached to the tax returns.
Second homes and mortgage deductions
For a second home to qualify for tax deductions, the owner, or the person responsible for the mortgage, must have spent a specific number of days in the home throughout the year. In other cases, the Internal Revenue Service would qualify the property as a rental property and is subject to different tax laws. Homeowner’s who have second homes should review Publication 527 if they are confused about the rules.
There are numerous opportunities for a homeowner to take a tax deduction for their home mortgage payments and for specific events that may occur such as destruction of the home, repairs and remodeling and refinancing of the home. However, a homeowner must ensure that they carefully review all of the rules that apply to their individual circumstances. For example, while a primary home loan to purchase may be eligible to claim points, personal mortgage insurance and other costs as a tax deduction, a cash-out refinance may not be eligible for these tax deductions. Homeowner’s should carefully review Internal Revenue Service Publication 936 for information and if in doubt, always contact a qualified tax accountant who can help take the mystery out of mortgage tax deductions.
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- Commonly Overlooked Tax Deductions to Watch Out For (2011tax.org)
- Unusual Tax Deductions You Should Not Claim (2012taxes.org)