1. Deduct Your Mortgage Interest
Usually, the mortgage interest on your home is completely tax-deductible. And you can deduct interest on multiple mortgages. Just make sure they do not exceed $1 million. The purpose of the mortgage must be specifically to buy, build or improve a home.
Your lender will send you a "Form 1098." This form shows exactly how much mortgage interest you paid for the year. To claim this deduction, fill out Schedule A (it's labeled "itemized deductions") and record your interest deduction.
You can also deduct late payment charges as home mortgage interest. Just make sure it is not for specific services received in connection with your home loan. The same is true for mortgage prepayment penalties: if you pay off your mortgage early and incur a prepayment penalty, you can deduct that penalty as home mortgage interest. This is subject to the same requirements for late payments.
2. Deduct Your Real Estate Taxes
Real estate taxes are the annual taxes based on the assessed value of a property. They are also tax-deductible. Your interest statement may list the amount of real estate taxes you paid if your taxes and homeowners' insurance were placed in an escrow account when you closed on your mortgage. It's possible that your real estate taxes are not included on the statement. In that case, review your cancelled checks to determine your total real estate tax amount.
3. Deduct Your Loan Points Paid on a Purchase
The points you pay on a purchase mortgage are deductible the year you made the purchase. Deduct any points you paid - and that a seller paid on your behalf - if you meet the following criteria:
&bull The loan is secured by your primary residence. And, the loan was used to buy, improve or build the home.
&bull Make sure that paying points (and the amount of points paid) is not an irregular practice in the seller's geographic area.
&bull Be certain the points are computed as a percentage of the loan principal.
&bull The points must be clearly delineated on the buyer's settlement statement.
&bull You put cash into your home purchase in an amount at least equal to the points you were charged.
- Seller-Paid Points are Deductible by the Buyer
When a seller pays points for the buyer (buys the mortgage rate down) the buyer gets a lower mortgage rate. The cost of those points is then deductible for the buyer.
4. Deduct Your Loan Points Paid on a Refinance
Did you refinance last year? If so, you may be able to write-off any points you paid to buy down the mortgage rate. Deduct the points proportionately over the life of the new loan. An example: if you took out a 30-year loan, you would deduct 1/30th of the points you paid each year.
5. Have You Refinanced More Than Once in Recent Years?
Many homeowners have overlooked this very important deduction: if you have refinanced more than once, deduct unclaimed points from an earlier refinance. Say you refinanced in 2004, and you paid points. You deducted 1/30th of those points in 2004 and 2005. But the rates continued to drop, so you refinanced again in 2006, and you paid off the 2004 loan. What about the remaining points you have yet to deduct? These points are fully deducted in 2006. This same deduction is available to you if you sold the house in 2006, rather than refinancing.
6. Deduct Your Interest on a Home Equity Loan
That interest on a home equity loan? It may be tax-deductible up to $100,000. But if the combined amount of your home equity loan and your first mortgage totals more than the property's actual value, that deduction may be limited. You can usually deduct the lesser of the interest on a $100,000 loan or your home's value less the amount of your first mortgage.
Please check with your tax advisor to determine which of these deductions applies to you!
