Buying a home can bring a number of changes into your life, including financial ones.  But for first time home buyers, those financial changes can be good news, especially at tax time.  Most people know that there are significant tax benefits to buying a home, but often aren't clear on exactly what's deductible.  So as 2007 winds down, I've compiled this brief list of tax benefits related to a home purchase.  Not all deductions apply to every situation, of course, so think of this as a list of things to discuss with your tax advisor.  

Mortgage Interest – Most homeowners are well aware of the mortgage interest deduction, as this is typically a large amount that makes the decision to itemize on Schedule A a no-brainer.  You’ll receive a Form 1098 from your bank with the amount you can deduct on Schedule A.  For most first time borrowers, but bulk of your mortgage payments for the first few years are mostly interest, so this one adds up quickly!  Interest on second trusts and Home Equity Lines of Credit (HELs or HELOCs) are also deductible within certain guidelines.  (Note: If you find that you are receiving a very large refund, you may wish to adjust your withholding using the IRS’ calculator here. )

PMI - Private Mortgage Insurance (PMI) is now tax deductible.  But look out - this only applies to loans originated in 2007, so not everyone will benefit.  There are also income limitations, and at least so far, this is just a one-year deal, so don't assume you can deduct it in 2008 and beyond.  (Update Dec 2007: If the mortgage originated between 2007 and 2010, the deduction has been extended.  Families with an AGI of $100K or less are eligible, and up to $109K is eligible for a partial deduction.) 

Points – Points—that is, mortgage interest that you prepaid at settlement—are also deductible.  A point is equal to 1% of the amount borrowed.  This one may or may not be on your 1098, but will be on your HUD-1 settlement statement from your closing.  Can’t find your settlement statement?  Ask you agent or settlement attorney for another copy.  Some agents (myself included) automatically mail another copy to clients in the beginning of the year following the purchase.   If you refinanced this year, then points can be deducted over the life of the mortgage. 

Property Taxes – Your real estate taxes will also be deductible on Schedule A.  It's easy to forget this deduction because most lenders collect it from borrowers as part of their monthly mortgage payment, and pay the local jurisdiction on their behalf.  If you’ve prepaid, then the payment is deductible in the year of actual payment.  So don’t forget to check that settlement statement to see if you prepaid any taxes that your lender may not be reporting!

General disclaimer: This advice is not intended to apply to all situations, as exceptions and limitations apply.  Please consult a tax advisor for your personal situation.   IRS guidance can be found at www.irs.gov

Contact Katie Wethman, CPA, MBA, REALTOR® at (703) 847-3336 or via email to list your property for sale or to purchase a property in the Washington, DC, Arlington, Alexandria, Fairfax County, Fairfax City, or Falls Church City.  I specialize in first time buyers.

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