Tax season is closing in, and if you’re a homeowner, you can claim big deductions that can help reduce the amount you’ll owe come April. Take a look at these 3 real estate tax deductions you don’t want to miss!
1. Mortgage Interest
Home mortgages are set up so that a large portion of each payment you make in the first few years of owning them home goes toward paying down the interest on your loan. Only a little amount goes toward the principal. While this news may be disconcerting, the good news is that you can deduct those interest payments on your primary (and sometimes a second) residence — up to $1 million (or $500,000 if you’re married and filing separately).
This applies to home purchases or newly refinanced mortgages, home equity lines of credit and home equity loans. This deduction, filed with IRS Form 1098, can add up to thousands of dollars for most homeowners. It reduces your taxable income so you don’t owe as much at tax time.
2. Property Tax
Another benefit of homeownership is writing off your annual property taxes. You get to deduct these taxes in the year they’re paid, not the year they were due. The property assessor’s office typically sends out a statement at the beginning of the year showing the amount of your property taxes.
Remember: If you bought a home and reimbursed the sellers for taxes they had already paid for the year, you’ll see that reflected on your settlement statement, not on your 1098.
If you bought a home in 2016, you can deduct your mortgage points. Many homeowners completely overlook this deduction. Most borrowers pay for points; discount points allow you to prepay some of your loan interest in exchange for a better mortgage rates. One point is equal to 1% of your loan amount.
So how does the deduction work? Let’s say you bought a home in Aliso Viejo for $800,000 with a 1 percent origination fee. That’s $8,000 you can itemize as a deduction on your tax bill.
Keep these real estate tax deductions in mind as tax season approaches, but always remember to consult with your accountant!