Home ownership is good for tax deductions. Get a jump on yours!

Thinking about buying a home, or just bought one? Homeownership is still advantageous at tax time, not to mention one of the most satisfying experiences of adulthood. Here are some home ownership-related tax deductions and strategies to help lower your tax bill in 2017:

Mortgage interest deduction

To claim the mortgage interest deduction, you must itemize using Schedule A, and your mortgage must be secured by your primary or second home. That home can be a house, trailer, or boat, as long as you can sleep in it, cook in it, and it has a toilet.

Interest you pay on a mortgage of up to $1 million—or $500,000 if you're married filing separately—is deductible when you use the loan to buy, build, or substantially improve your home.

If you take on another mortgage (including a second mortgage, home equity loan, or home equity line of credit) to improve your home or to buy or build a second home, that counts towards the $1 million limit, and the interest is still deductible.

If you use loans secured by your home for other things—like sending your kid to college—you can still deduct the interest on loans up $100,000 ($50,000 for married filing separately) because your home secures the loan. However, this rule changes for 2018, and the interest on such loans will no longer be deductible unless the proceeds are used to substantially improve a home.

Beginning with tax year 2018, the mortgage interest deduction cap is $750,000, and fewer people will likely itemize (and therefore take the MID) because of the increase in the standard deduction.

Prepaid interest deduction

Prepaid interest (or points) you paid when you took out your mortgage is generally 100 percent deductible in the year you paid it along with other mortgage interest. However, you must itemize to take it.

If you refinance your mortgage and use that money for home improvements, any points you pay are also deductible in the same year.

But if you refinance to get a better rate or shorten the length of your mortgage, or to use the money for something other than home improvements, such as college tuition, you'll need to deduct the points over the life of your mortgage. Say you refi into a 10-year mortgage and pay $3,000 in points. You can deduct $300 per year for 10 years.

So what happens if you refi again down the road?

Example: Three years after your first refi, you refinance again. Using the $3,000 in points scenario above, you'll have deducted $900 ($300 x 3 years) so far. That leaves $2,400, which you can deduct in full the year you complete your second refi. If you paid points for the new loan, the process starts again; you can deduct the points over the life of the loan.

Home mortgage interest and points are reported on Schedule A of IRS Form 1040. Your lender will send you a Form 1098 that lists the points you paid. If not, you should be able to find the amount listed on the closing docs you got when you purchased your home or refinanced.

Property tax deduction

Again, for 2017, you can deduct on Schedule A the real estate property taxes you pay if you itemize, without limit. If you have a mortgage with an escrow account, the amount of real estate property taxes you paid shows up on your annual escrow statement.

For tax year 2018 and beyond, you can deduct local and state taxes, including property taxes, up to $10,000 combined. This again depends on whether you itemize, which many homeowners will not be able to do in 2018 due to a large increase in the standard deduction.

If you bought a house this year, check your closing documents to see if you paid any property taxes when you purchased your house. Those taxes are deductible on Schedule A, too.

The federal tax law signed by President Donald Trump Dec. 22, 2017, goes into effect for the 2018 tax year and generally doesn't affect tax filings for the 2017 tax year.

The Eastern CT Association of Realtors is the Voice of Real Estate in Windham and New London Counties, with over 925 Realtor members helping families buy or sell real estate.  Just as a Realtor is your trusted advisor to guide you through your most important purchase, using a tax accountant to maximize your home ownership deductions is highly recommended.  To find your local Realtor, go to www.easternctrealtors.com

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