Real Estate Insights

Deducting Mortgage Interest:  Mortgage interest on a primary residence is usually fully tax deductible*, unless your mortgage balance exceeds $1.0 million or you took out a mortgage for reasons other than buying, building or improving a home.

To claim this tax deduction, you should fill out schedule A, labeled “itemized deductions.” Your lender should have sent you a “Form 1098” that reflects exactly how much mortgage interest you have paid over the past year. Be sure to record your interest deduction on line 10 of the schedule A.

In addition to mortgage interest, late payment charges may also be deducted as home mortgage interest if not for a specific service received in connection with your home loan. The same is true for mortgage pre-payment penalties – if you pay off your mortgage early and incur a pre-payment penalty, you can then deduct that penalty along with your interest deduction (subject to the same requirements for late payments).

Deducting Real Estate Taxes:  Real estate property taxes, which are annual taxes based on the assessed value of a property, are also tax deductible. Your mortgage interest statement may list the amount of real estate taxes you paid if your property taxes were placed in a lender’s escrow account (also called an impound account) when you closed your mortgage.  If your monthly payments did not include an amount for your real estate taxes, you could review your cancelled checks to determine your total real estate tax deduction or be sure to keep record of your property tax bills as you receive them at the beginning of each year. Supplemental property taxes in addition to your regular property tax installments may also qualify as an income tax deduction.

Deducting Loan Origination Points:

Points paid on a Purchase  - The points (loan origination points, discount points, etc.) you pay on a purchase mortgage are fully deductible the year you made the purchase. You can deduct any points you paid – and that a seller paid on your behalf – if you meet the following criteria:

• The loan is secured by your primary residence and the loan was used to buy, improve or build the home
• Paying points (and the amount of points paid) is not an irregular practice in the seller’s geographic area
• The points are computed as a percentage of the loan principal
• The points are clearly delineated on the buyer’s settlement statement,
• You put cash into your home purchase in an amount at least equal to the points you were charged

Points paid on a Refinance – If you refinanced last year, you may be able to write-off any points you paid to buy down the mortgage rate. To do so, you deduct the points proportionately over the life of the new loan. For example, if you took out a 30-year loan, you would deduct 1/30^th of the points you paid each year.

If you’ve refinanced more than once in recent years then you should know that you can deduct the remaining proportion of points paid for the original loan in the year you refinance or you pay that loan off.  So be sure to keep your settlement statements in a safe place and keep copies in your new tax files until you have refinanced that loan into a new one.

Deducting interest on a Home Equity Loan or Line of Credit:  The interest paid on a home equity loan or line of credit may also qualify as an income tax deduction when the following criteria are met:

• For interest paid on home equity loans or lines of credit used for general cash out purposes (consolidating consumer debts and etc,), the amount of interest paid on an amount equal to or less than the original total purchase financing adjusted for amortization plus $100k not exceeding a total of $1.1 million, may qualify as an income tax deduction.
• Equity pulled out of the property and used for home repairs, home remodels, and general home upkeep, the total amount of interest paid on these amounts up to the $1.1 mil cap when combined with your purchase money financing, May be tax deductible

**Please Note: Always contact your CPA or Tax Professional to find out how these suggestions may impact your income tax returns. Not all deductions may apply if you qualify for the Alternative Minimum Tax brackets and depending on the use of each property claimed on your returns.