Which Mortgage Costs Are Tax Deductible?
Homeownership comes with a variety of financial benefits, one of the most significant being the potential tax deductions available on mortgage costs. Understanding which mortgage costs are tax deductible can help you maximize your savings and make informed financial decisions. At Patriot Mortgage in Eugene, Oregon, we aim to provide you with the knowledge you need to navigate these benefits effectively.
Mortgage Interest Deduction
One of the primary tax deductions available to homeowners is the mortgage interest deduction. Homeowners can deduct the interest paid on their mortgage for their primary residence and, in some cases, a second home. This deduction applies to interest paid on loans up to $750,000 (or $1 million if you bought the home before December 16, 2017) (IRS - Topic No. 505 Interest Expense, https://www.irs.gov/taxtopics/tc505).
Property Tax Deduction
Homeowners can also deduct state and local property taxes, up to a limit. The Tax Cuts and Jobs Act capped this deduction at $10,000 ($5,000 if married filing separately). This deduction includes the total of property taxes, along with state and local income or sales taxes (IRS - Publication 530 Tax Information for Homeowners, https://www.irs.gov/publications/p530).
Points Deduction
If you paid points to lower your mortgage interest rate when you took out your loan, you might be able to deduct these points. Points, also known as loan origination fees, are typically deductible in the year they were paid if the loan is for your primary residence. If the loan is for a second home or investment property, the points must be deducted over the life of the loan (IRS - Publication 936 Home Mortgage Interest Deduction, https://www.irs.gov/publications/p936).
Private Mortgage Insurance (PMI) Deduction
Private Mortgage Insurance (PMI) is another cost that may be deductible. For loans taken out after 2006, homeowners can deduct the cost of PMI premiums, subject to certain income limits. This deduction is available for primary residences and second homes, but not for rental properties (IRS - Publication 936 Home Mortgage Interest Deduction, https://www.irs.gov/publications/p936).
Home Equity Loan Interest Deduction
Interest on home equity loans and home equity lines of credit (HELOCs) may also be deductible, provided the funds were used to buy, build, or substantially improve the home that secures the loan. The total amount of the loan must still fall within the $750,000 loan limit for deducting mortgage interest (IRS - Home Equity Loan Interest Still Deductible, https://www.irs.gov/newsroom/home-equity-loan-interest-still-deductible-under-new-law).
Non-Deductible Mortgage Costs
While several mortgage-related expenses are tax-deductible, some costs are not. These include:
Homeowners insurance premiums
Depreciation
Utility costs
Most settlement costs (other than points)
Forfeited deposits, down payments, or earnest money
Maximizing Your Tax Deductions
To maximize your tax deductions, keep detailed records of all mortgage-related expenses and consult with a tax professional to ensure you're taking full advantage of the available deductions. By understanding which costs are deductible, you can better manage your finances and potentially save a significant amount on your taxes.
At Patriot Mortgage, we're dedicated to helping you understand the financial benefits of homeownership. For more information on mortgage costs and tax deductions, visit our website or contact us today.
References:
IRS - Topic No. 505 Interest Expense, https://www.irs.gov/taxtopics/tc505
IRS - Publication 530 Tax Information for Homeowners, https://www.irs.gov/publications/p530
IRS - Publication 936 Home Mortgage Interest Deduction, https://www.irs.gov/publications/p936
IRS - Home Equity Loan Interest Still Deductible, https://www.irs.gov/newsroom/home-equity-loan-interest-still-deductible-under-new-law