The Benefits of Home Ownership
Whether it is the luxury of space or the beauty of privacy, there are many intangible benefits of owning a home. But home ownership has its financial benefits as well. In addition to reducing your cost of living expenses when you are older, you also benefit while you still have a mortgage, and one form of those benefits is through tax savings. Although you have to pay your mortgage, interest payments, and property taxes, in many instances you can deduct certain expenses on your taxes. Are closing costs tax deductible? Keep reading for an overview of your potential financial savings associated with buying and owning a home.
Are Closing Costs Tax Deductible?
To complete your home purchase, you need to pay not just your down payment, but closing costs too. On average, the closing costs for your mortgage are calculated to be three percent of your loan principal.
Closing costs are a mix of expenses that you need to pay to complete your home purchase. They can include title searches, homeowner’s insurance, real estate appraisal fees, home inspection expenses, private mortgage insurance, and possibly more. Are closings costs tax deductible? In one word: yes. You can deduct some of the closing costs of your mortgage from your income taxes, as indicated below.
Prepaid Mortgage Interest
Prepaid mortgage interest is interest on a mortgage you pay before it is actually due. Borrowers often prepay interest as part of their closing costs either as a way of reducing their interest payments or else as a condition set by lenders for approving their mortgage. If the period you paid for in advance extends beyond the current tax year, then you will have to apply the interest deduction over the years where it applies.
Pro-rated Property Taxes
Are closings costs tax deductible? In regards to pro-property taxes, you can deduct this value on your yearly tax form. You need to pay pro-rated property taxes when the seller’s tax payment carries over into the month when you took possession. After the property closes, you will need to pay the amount of taxes owing for the number of days you owned the home for that month.
If you are buying a rental or investment property, then you can deduct your transfer taxes as well. Additionally, items such as hazard insurance or association fees for rental properties are tax deductible.
Real Estate Taxes
You can also deduct real estate taxes that you paid as part of your mortgage’s closing costs. These taxes can increase your closing costs by hundreds of dollars.
Non Tax-deductible Costs
Are closings costs tax deductible? Not all of them. Some closing costs that you must pay for entirely on your own include the following:
For High Income Earners
While earning a higher income can certainly alleviate some financial issues in general, the more you make, the less you are allowed to deduct from your income taxes.
If you are refinancing your mortgage, some mortgage lenders may charge you a prepayment penalty. You may be allowed to deduct this penalty if it is not linked to a service performed specifically for your new loan.
Math is the Method
Tax deductions are certainly a wonderful way of reclaiming some of the costs that you paid when purchasing a home. However, do not assume that you can deduct every single every fee, expense, or cost that you incurred. Before obtaining a mortgage, do your math – figure out what you can and cannot deduct, while accounting for your particular circumstance; after all, your situation may or may not allow you to claim certain deductions.
Also, do not buy a home based on possible deductions – make sure you can afford all payments with some buffer built in. When in doubt, ask your mortgage lender or tax professional for details to help guide you towards the best and most rewarding financial decision of your life.