There are a lot of good reasons for buying a home. A tax deduction is really not usually one of them – we’ll crunch the numbers in a moment. But make no mistake; there are solid tax benefits to having a mortgage. However, you’ll have to say “so long” to the short form and file a Form 1040 – and itemize your deductions.
The most significant tax benefit is the deduction for the mortgage interest you pay. And that’s usually a pretty big number. Your lender will issue a statement showing the interest you’ve paid each year (Form 1098).
For instance, if you had a mortgage of $250,000 at 4%, your monthly note would be around $1,600 per month, based on a rough estimate of taxes, insurance, etc. During the first year, you would pay about $10,000 in interest – and likely be able to deduct the full amount. Sounds like a great deal, right?
Or, you could file a short form and take the standard deduction of $12,400 (for tax year 2014, married filing jointly). That’s why it usually makes little sense to buy a house simply for the tax deduction.
The deduction may be limited if your mortgage totals more than $1 million ($500,000 if married filing separately), or if you took out a mortgage for some purpose other than to buy, build or improve your home. But the interest is usually deductible for a first or second mortgage, as well as for home improvement or home equity loans and lines of credit. Even late payment charges are considered deductible.
“Points” paid to lower your interest rate at the start of the loan are also deductible, with certain restrictions. Other fees typically charged at the loan closing are not deductible, such as the appraisal, notary fees and the rest.
Real estate taxes
You also get a break for paying real estate taxes to a state and local government. These taxes are usually built in to your total payment and will be listed on an annual escrow statement from your lender or loan servicing company. You can only deduct the actual amount paid during a tax year, not the balance held in an escrow account for future payments.
Mortgage insurance premiums
Some home loans include mortgage insurance premiums, and you can usually deduct these, too. This tax break was set to expire at the end of the 2013 tax year; however, it has been included in several “tax extender bills” floating through Congress for months. It’s still not officially renewed (as of 5/22/14).
Don’t get confused: This is not a deduction for property insurance — qualified mortgage insurance is provided by private insurers, as well as the Federal Housing Administration, the Veterans Administration or the Rural Housing Administration. It is included in your house note as protection to lenders, and it applies to borrowers who make a down payment of less than 20% when purchasing a home.
If your adjusted gross income is more than $100,000 ($50,000 if your filing status is married filing separately), the amount of your mortgage insurance premiums that can be deducted may be reduced or eliminated.
And one more mortgage tax benefit
And one final tax break from having a mortgage: If you are a minister or in the armed services and receive a non-taxable housing allowance, you can still deduct real estate taxes and mortgage interest. You don’t even have to reduce the deduction by the amount of the allowance received.
While you might not get a mortgage simply because of the tax breaks, they sure are another welcome benefit of homeownership.
Filling out tax form image via Shutterstock.