Tax considerations of homeownership
Buying a home has potential tax benefits. The IRS, and most state governments, may allow you to deduct some of the mortgage Glossary Term: interest and Glossary Term: property taxes – from your income taxes. How does it work? Each tax situation is different, so consult your tax advisor about your particular situation. Here are some areas to look at when you consider buying a home.
Mortgage interest: You may be able to deduct some or all of your mortgage interest from your income taxes. This can be a significant amount, especially during the early years of your loan, when a higher percentage of your loan payment tends to go towards interest.
Property taxes: As a homeowner, you’ll be responsible for paying state or local property taxes. However, these taxes may be deductible on your federal income tax return. For example, if you pay $5,000 in property taxes in a tax year, and your marginal federal income tax rate is 25%, you may see a tax savings of $1,250 ($5,000 x 25%).
Private mortgage insurance (PMI): For conventional loans, if your Glossary Term: down payment is less than 20% of your home’s purchase price, you may be required to pay Glossary Term: private mortgage insurance, or PMI. These costs may be tax deductible.
Some closing costs: You may also be able to deduct some of the one-time costs of buying a home. For example, if you pay Glossary Term: points when you close your home loan, the cost of those points may be tax-deductible. If you are charged local transfer taxes when you buy a home, you may also be able to deduct the cost of those taxes.
Homebuyer tip:Whenever you make any significant tax decisions, it’s a good idea to speak with a tax professional first. They can look at your specific situation and any local or federal laws that may affect your ability to qualify for tax advantages like these.