This was written by my wonderful CPA, Michele Knight!
Owning a home is commonly known as a great way to save money at tax time, but are you sure that you're taking advantage of all the benefits? It's important to know the ins and outs of the deductions available to you, so that you can maximize your deductions and your savings.
First, let's review the main deductions available to you on your 2006 tax return. Most homeowners file a Schedule A instead of using the standard deduction, so they can deduct real estate taxes and mortgage interest. Real estate taxes are deductible if they are based on the assessed value of the real property, and the taxing authority charges a uniform rate on all property in its jurisdiction. As an example, homeowners' association dues are not deductible because they are assessed by an association, not a taxing authority.
Mortgage interest is also deductible, but within certain limits. If you take out a mortgage to buy, build or improve your home, and that mortgage is for less than $1 million, then the interest is deductible. Interest amounts paid on home equity lines of credit (commonly known as HELOC's) follow similar rules. HELOC's can be a bit trickier because the proceeds are often used for multiple purposes. If you use $20,000 of a line of credit to improve your house and $10,000 of the same line of credit to pay off credit card debt, you can only deduct the portion of the interest attributable to the improvement of your home.
Often your amounts of real estate taxes and mortgage interest paid are listed on the 1098 that you receive from your mortgage company. However, it is also important to check for other taxes and interest you paid, either directly to the taxing district (if you pay the taxes yourself and not through an escrow arrangement with your mortgage holder) or as the buyer or seller at a closing. In a year when you buy or sell property you should review the settlement statement that you receive at the closing to see if you paid any additional amounts that were not reported through your mortgage company.
Two other deductions receive honorable mention. Mortgage points may also be deductible, but with quite a few limitations. I recommend reading IRS Publication 530, Tax Information for First-Time Homeowners, to learn more about deducting points.
And, beginning in 2007 taxpayers will be able to deduct mortgage insurance or PMI. This will be allowed as an itemized deduction, but only for those individuals with adjusted gross income of $100,000 or less, as the deduction begins to phase out for those with higher incomes.
Naturally, I have to include the caveat, "the above information is not considered tax advice and you should consult a professional tax advisor to help answer specific questions regarding how tax laws apply to your situation." The good news is, I'm only a phone call away. Please visit http://www.cpamichele.com/ for tax tricks & tips or call me at 303-598-4413 if you would like assistance with your our personal or small business tax needs.
