If you bought a new home in 2015, here are some things to think about as you get ready for tax season:
One of the biggest perks of owning your own home is the benefit of deducting your mortgage interest. You can deduct home mortgage interest if your file Form 1040 and itemize your deductions on Schedule A (Form 1040). It is important to note that the mortgage must be a secured debt — that is, for example, that your home is the security for the mortgage — and that you have an ownership interest. Both you, and your lender, must intend that you will repay the loan.
The amount you can deduct depends upon the date and amount of the mortgage, and how you used the mortgage proceeds.
If this is your first home mortgage, you may want to seek the advice of a tax professional to make certain you get the complete deduction due to you and that your set up the original tax basis correctly.
Points are the prepaid interest you offered at your home’s closing in order to get a better interest rate on your loan. When the points you paid meet certain criteria, they may be deductible on your income taxes. This is another area to discuss with your tax professional, since certain unusual transactions are not allowed.
Private mortgage insurance (PMI) is insurance meant to protect your lender in case of default. Some mortgages require PMI as a condition of the mortgage for a first-time buyer or for a smaller down payment. If you paid PMI, you MAY be able to claim a deduction if you itemize, and meet certain requirements. Do not assume that your PMI is deductible, however, since Congress determines from year to year whether or not PMI deductions are allowable.
Real Estate Taxes
Your state, county or city governments typically charge what is known as an ad valorem tax based on the value of your home. Many lenders add the potential amount of your ad valorem taxes to your payment amount and then place that amount in an escrow account. When your property taxes come due at the end of the year, your lender makes the payment for you. This should be detailed on your monthly statements. If you pay property taxes, you often can deduct these from your income taxes on your itemized Schedule A.
As you prepare your tax documents, keep track of your other potential deductions — for charitable donations, as an example — because it is the total of all of these that works together to give you the biggest deduction on your taxes, since it has to be more than the standard deduction.
If you sold a home to buy a new home and made more on the sale than the cost basis of the new home you may owe taxes on the profit. There are special circumstances that can keep you from owing on these gains, so this is an area to discuss with your tax professional as well.