New Homeowners and Tax Deductions

New homeowners with a mortgage are often unsure of the tax benefits of home ownership while recent home sellers are unaware of how the profit from the sale of their home will affect their tax return.  The new tax season is up on us and it is especially important for new homeowners to

Here are a few tax deductions associated with home ownership.

– If You Itemize

Mortgage Interest Deduction

By January 31st, homeowners should receive a 1098 from their mortgage servicers.  This form will provide the amount of interest paid during 2018 on outstanding mortgages.  If you bought a home last year and paid points to secure the mortgage, the points paid can also be deducted on your tax return.

Interest paid on your mortgage during the year is deductible on your tax return.  If married, filing jointly the interest paid on loans up to $750,000 or $375,000 for single or married filing separately.  This can be a substantial deduction for new homeowners since interest payments are usually highest at the beginning of the mortgage term.  It should be noted that the total mortgage debt includes 2nd home and Home Equity Line of Credit (H.E.L.O.C.)

In order to be deductible, interest on H.E.L.O.C. has to be from funds used for home improvements.  If funds are used to go on vacation, it cannot be deducted.  However, if funds are used to finish a basement, update a kitchen or bath, it can be deducted.

Property Taxes

Property, state, city and sales taxes paid by the homeowner are also deductible.  Recent changes to the tax law caps this deduction at $10,000, filing jointly or $5,000 if single.  New homeowners should be aware of the property tax deadline for their area and ensure that their taxes are paid on time.  Timely payment of property taxes are very important and is the homeowner’s responsibility.  Even if the taxes are included in the monthly mortgage payment, homeowners should make sure the mortgage servicer pays the taxes by the due date.

Rental Properties

Homeowners with rental property can deduct improvements done on rental properties.

Home Office

Improvements on a space within the home exclusively used as a home office can also be deducted.

Capital Gains

If a home was sold in 2018, the seller is entitled to tax free gains of 250,000 for single filers and $500,000 if married filing jointly.  The homeowner must have lived in the home two of the last five years prior to selling the home.

Buyers and sellers of homes are advised to consult an experienced tax professional to determine how to proceed with filing their tax return.

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