Are you currently in the process of purchasing a home? If so, you might already be aware of the fact that your mortgage has a significant impact on your taxes. Owning a house is expensive, and the best way to ensure that you’re paying the right amount every year is to work with a tax professional. However, here are some of the issues that you need to know if you’ll be purchasing a piece of real estate during the next fiscal year.
Tax Fact: You can deduct your interest when you pay your taxes.
If you purchase a home, your home mortgage interest is considered a tax deduction whenever you pay in your taxes. To get this deduction, you need to report your mortgage interest on Form 1040, Schedule A, which is the form on which you report other itemized deductions. This small fact could be a lot of money for you! If your interest and other deductions exceed the standardized amount given to everyone, you can file with your itemized deductions for a bigger break on your taxes. You’ll also need Form 1098 from your mortgage lenders and your HUD-1 Settlement Statement from your title and escrow company if you purchased (or sold) a home in the past year.
The interest available as a deduction for this includes anything you paid for the home, for a home equity line of credit, or for a construction loan. However, these deductions are someone limited - you can only claim them on your primary residence and on your second home. Other pieces of real estate you own after that does not apply in this case.
Tax Fact #2: You should prepare to pay real estate taxes.
When first-time homeowners purchase a home, they usually forget to consider the money they’ll spend on things other than their monthly mortgage payments. You’ll also have to pay real estate taxes. Real estate taxes are part of property taxes, which also include boats, aircrafts, business inventory, and some household items like works of art. A local tax assessor determines your taxes based on the value of the land and building on it.
How your taxes are figured out is a somewhat complex matter. In some places, you are taxed on 100% of the land you own. In other places, you are only taxed on a percentage of this real estate. Sometimes your taxes are combined and other times you’ll pay separate taxes for land and for the building. The important thing is that you find out tax rates n your area and prepare to pay for them.
Tax Fact #3: You can deduct private mortgage insurance.
As of 2007 and until at least 2010, if you pay for private mortgage insurance, you can deduct it on your taxes. This is significant because before this law went into effect, many people worked hard to avoid private mortgage insurance. Private mortgage insurance must be bought if your mortgage is for more than 80% of the property’s total value. Some people were using a second loan (called a piggyback loan) to help pay for the down payment so that the mortgage wouldn’t have to cover more than 80% of the price. However, now that you get a tax deduction, it may be a better option simply to pay for the private mortgage insurance. It depends on how much you’ll pay for a monthly premium as compared to how much you’ll pay in interest for the second piggyback loan.
Tax Fact #4: If you sell your home, be prepared to possibly pay capital gains taxes.
When you sell your house, you’ll usually doing so for profit, since when you first got your mortgage the home was worth much less. Over the years, the value of the home might have appreciated and, in addition, it is important to remember that if you’re selling, you should try to do so when the market is good for selling homes.
Capital gains taxes are basically taxes you pay as a response to making money on the sale. There are many exemptions available, especially if you don’t make a ton of money, but before you decide to sell your house, it is important to learn about the taxes you’ll owe if you sell it for a profit.
As you can see, mortgages and real estate have a big effect on the taxes you’ll owe to the government. If you work with a profession realtor, it should be no problem figuring out these expenses and planning for them. However, make sure that you aren’t left out in the dark - you need to plan to pay your taxes or you could be very surprised at the end of the year!
