The Internal Revenue Service allows a significant number of tax deductions for homeowners that are not available to renters. When you become a new homeowner, you should keep careful records of all of your expenses so that you can claim a number of deductions at the end of the year. Most of these deductions are itemized, so you cannot also take the standard deduction, but because of the significant expenses associated with the new home ownership, you usually benefit significantly by itemizing.
The mortgage-interest tax deduction will be a major tax break for most new homeowners. Most of your monthly payments for the first several years of the mortgage go toward paying down the interest on the account, so your interest deduction will be significant. The IRS allows you to deduct the interest that you pay on the first $500,000 of your mortgage and doubles the limit for married couples filing a joint return. At the end of the year, you will receive a form 1098 from your lender that shows the amount of interest you paid during the year in box 1.
When you take out your mortgage, most lenders give you the option to pay for discount points. These points are additional closing costs that reduce the interest rate you pay over the life of the loan. The IRS allows you to deduct these costs in the year that you pay them. When you receive your form 1098, you will see the amount you paid in tax-deductible points in box 2.
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Real Estate Taxes
Real estate taxes offer two deductions. The IRS allows you to deduct the first $500 of your real estate taxes as an adjustment to income, so you can claim this deduction even if you decide not to itemize. Like the mortgage-interest deduction limit, the $500 limit is doubled for married couples filing joint returns. If your real estate taxes exceed the limit, you can claim the remainder as an itemized deduction.
Private Mortgage Insurance
Private mortgage insurance is a charge required for most people who put down less than a 20 percent down payment on their home. If you took out your mortgage after 2006, you are allowed to deduct these charges as an itemized deduction. The amount you paid in private mortgage insurance during the year will be listed in box 4 of your form 1098.
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