There’s no denying it: A mortgage is an incredibly useful thing. After all, few people have the cash on hand to purchase a home outright. If you don’t, getting approved for a mortgage is generally an essential step along your journey to homeownership. However, the impact of having a mortgage doesn’t stop when you accept the keys to your new home. Like dropping a stone in a pond, there’s a ripple effect that’s sure to touch many aspects of your life. So, how does a mortgage affect your taxes?
How Does a Mortgage Affect Your Taxes?
Having a mortgage can impact your taxes. Being a homeowner can also affect your taxes. Understanding how just might save you money on your tax bill, so you’ll want to investigate the specifics of your situation carefully. If you have questions about whether you’re eligible for a specific deduction, speak with a tax professional about your circumstances.
Potential Impacts of a Mortgage at Tax Time
How does a mortgage affect your taxes? As NerdWallet reports, there’s a chance that you might be able to claim the mortgage interest deduction if you itemize at tax time. This deduction lets homeowners deduct the amount of interest that they paid on their mortgage. There are limits, however. You can take up to $1 million off your taxes if the home was purchased before Dec. 15, 2017. If it was purchased after that date, you are limited to $750,000.
The mortgage interest deduction can be used for both primary residences and second homes or investment properties. If the property is a second home, the rules are a little different. If it isn’t rented out, there’s no requirement for you to spend time there. However, if you do use the property to generate income, then you must spend time there to qualify for the mortgage interest deduction. How much time? You’ll need to be there for the longer of at least 14 days or more than 10 percent of the number of days that it was rented. If you have questions about deducting home mortgage interest, IRS Publication 936 covers the rules for deducting home mortgage interest.
Did you have mortgage points? These may also be a factor at tax time, according to TurboTax. Most homebuyers deduct their mortgage points the year that they buy their home, but if you’re not able to, then you may be able to stretch it out over the life of your home loan. In order to deduct mortgage points, the following statements must all be true:
- You use cash accounting when completing your taxes.
- The use of points is normal business practice for the area.
- The number of points used was not excessive for the area.
- The points cannot be used for items typically paid for with stand-alone fees. Property taxes would be an example.
- You cannot borrow funds from the lender to pay for the points.
- The points must be a percentage of your loan amount.
- The amount you paid must be itemized as points on the statement.
- The mortgage must be used to build or buy a primary residence.
Would you appreciate a deeper dive into tax topics for new homeowners? Check out IRS Publication 530. It’s designed to serve as an introduction.
Potential Impacts of Homeownership at Tax Time
As the Tax Policy Center points out, owning a home also offers taxes benefits:
- Property taxes. Homeowners who itemize are often able to deduct their property taxes.
- Home sales profits. Capital gains taxes can take a painful chunk out of any profit, but homeowners who meet certain criteria are able to exclude up to $250,000 or $500,000 for joint filers of their profits from a home sale from capital gains taxes.
- Imputed rent. Economists call the chance to live in a home rent-free imputed rent. Landlords must count the rent they receive as income. Renters aren’t able to deduct their living expenses. Paradoxically, the tax code treats homeowners as both landlords and renters, but it doesn’t require them to pay tax as a landlord, and it does allow them to take deductions for their expenses.
PrimeLending West Texas makes home loans simple. Whether you’re buying or refinancing, our team is ready to lend a hand. Contact us today.