Mortgage Interest
Like most things that accrue interest, they can be taxed. In this case, that tax actually works in your favor as a tax break. I think this one of the most important tax breaks that most homeowners can take advantage of because it applies to the majority of people. Your bank should be sending you a statement that you can plug in into your tax return. This tax break applies to a second mortgage such as refinancing, equity loans and lines of credit as long as they are under $100,000.
Points
Have you ever owned a home before? If the answer is yes, then you are probably familiar with the point system that both banks and lenders use.
BankRate.com offers a great explanation on points
"A point is a fee equal to 1 percent of the loan amount. A 30-year, $150,000 mortgage might have a rate of 7 percent but come with a charge of 1 point, or $1,500. A lender can charge 1, 2 or more points. There are two kinds of points -- discount points and origination points."
Points offer tax breaks too, so if you’ve paid on points on your mortgage you qualify for tax breaks on them. This only applies to the years that you’ve actually paid points. This also applies if you’ve refinanced, however this will usually span over the course of the life of the mortgage so it works a little bit differently than points paid on a non-refinanced loan. Lines or credit and equity loans are also included.
Taxes Paid
Taxes accumulate over the course of the year which have to be paid at the end of the year, all of these taxes paid can be written off too. This is as long as you own your home of course and have to be subtracted as an itemized expense on Schedule A. If you’ve recently bought your house or sold it, you may only be responsible for “partial” taxes, because you didn’t own the house the whole year, take this into consideration when you’re entering all your information under your itemized expenses.
Selling Your Home
There is a law protecting those making a profit when they sell, as long as you have lived in your house for more than two years and as long as it doesn’t exceed more than $250k, or $500k jointly in sales, you can take that profit tax free! The only other restriction is that you have to have lived in the home that you’re selling at least two of the five years before the sale. It’s incredible that not a lot of people are aware of this tax break because I think that it would incentivize those whose houses have regained value in the past couple of years to make a sale.
Foreclosures
If you’re one of the very unlucky individuals that lost their home due to unforeseen circumstances which resulted in a foreclosure, there is light at the end of that dark tunnel. According to the Mortgage Debt Relief Act of 2007, homeowners who were foreclosed, completed a short sale or had their home debt reduced by mortgage restructuring do not have to count the canceled debt as taxable income.
When you have any kind of credit line, default and get it reduced or forgiven by the lender, the bank acts as if this was “income” that you received. The way that they figure this is that the lender has given you something that you were not able to pay back, when you get that wiped out or "forgiven", the government says “you still received that money, and now that you’re unable to pay it back, we’ll count it as income”. No one borrows money with the intention of defaulting, this is why this relief act was introduced, to help those who were already facing hard times.
Is there anymore tax breaks you could get? Absolutely! But these are the most common ones that I encounter when helping people buy and sell their homes. Let’s hope this information helps those homeowners out there save a little money come tax time!
