It’s hard to escape the glow of purchasing your new home and wake up to the not-so-fun paperwork of being a homeowner.For one, you’ll have more taxes to file, but on the plus side, that also means more tax benefits and credits for you!
Kathy Pickering, the executive director of The Tax Institute at H&R Block shares what kind of tax goodies you qualify for as a new homeowner.
Mortgage Interest Deduction
You can deduct qualified mortgage interest on your main home and a second home if you itemize deductions on Schedule A. You must be legally liable for repayment of the loan to deduct the loan interest.
Taxpayers who cannot pay at least 20 per cent of their down payment may be required by their lender to pay for private mortgage insurance (PMI). If the taxpayer qualifies, the PMI may be deductible as mortgage interest. However, the PMI deduction has expired and will not be available to homeowners for their 2012 taxes unless it is renewed by Congress.
Real Estate Taxes
Real estate taxes are deductible by a homeowner, and are shown in Form 1098 which the taxpayer receives from the lender.
Form 1098 typically shows the amount of mortgage interest paid, real estate taxes paid, and homeowners insurance (hazard insurance) paid. Insurance is not deductible on property used as a personal residence even though it appears on Form 1098.
Real estate taxes are deductible separately from mortgage interest on Schedule A, and from property taxes. To be deductible, real estate taxes must be based on the home’s value and assessed at least annually.
When deducting real estate taxes, only the taxes actually paid on behalf of the taxpayer are deductible, not the amount the taxpayer paid into escrow.
If you have paid off your mortgage, you won’t receive a 1098 form from your mortgage lender. However, homeowners can still deduct their real estate taxes, if they can determine the amount based on their own records.
Mortgage Debt Forgiveness
Homeowners who experienced foreclosure on their primary home may be able to exclude the amount of canceled debt from their taxable income.
The home must meet the following criteria: (1) it must be the taxpayer’s primary residence; (2) the amount of debt forgiven cannot exceed $2 million; and (3) the loan must have been used to buy, build or substantially improve the home.
For example, you borrow $100,000 for a mortgage on your primary residence and default on the loan after paying back $20,000. If the lender is unable to collect the remaining debt from you, there is a cancellation of debt of $80,000, which is generally considered taxable income to you. Under the mortgage debt forgiveness act, this cancellation of debt (in this case, $80,000) is excluded from your taxable income.
In contrast to homeowners, renters don’t have any specialised tax breaks for the rent that they pay at the federal level. Some states do have a renters’ tax credit for the low income
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