Becoming a homeowner is part of the American dream, but it also comes with a lot of new expenses that could put a person's finances in jeopardy. However, there are numerous breaks that people can take advantage of to help cancel out these costs during tax return preparation.
- Mortgage interest: Unless consumers are wealthy or have cash from a previous sale, most will need to obtain a mortgage to purchase a home. This will be expensive, with monthly payments in the thousands. In addition to the principal balance, borrowers will pay interest, which makes payments even higher. Fortunately, this interest can be deducted come tax season. According to Bankrate.com, all mortgage interest is deductible unless a home loan is greater than $1 million. This can be a great benefit as interest can be a significant amount of money each year, meaning people can reduce their taxable income significantly.
- Private Mortgage Insurance: Coming up with a large down payment is recommended when purchasing a home, as it means people don't have to borrow as much money, which can help them secure better loans. But, not everyone is able to do so, and people who don't come up with at least 20 percent will likely need to purchase private mortgage insurance. This can add a couple hundred dollars to a mortgage payment. The good news is that it's tax deductible if a home loan was originated after Jan. 1 2007, according to Realtor.com.
- Mortgage points: In certain instances, homeowners will pay points on a home purchase or refinancing when taking out a mortgage. These are fees that lenders charge to originate the loan, and are tax deductible in some cases. People who buy homes can deduct all of the points pay in the same year, but refinancing points need to be deducted as an amortization throughout the entirety of the loan.
- Profit on sales: A home sale can bring in a significant amount of profit for many people, but that is sometimes subject to capital gains text. However, there are a couple of deductions that can be taken advantage of when a sale is closed. Single people can claim up to $250,000 of profit tax-free and married couples can claim $500,000. The home has to be a primary residence, which means people must have lived there regularly for at least two of the past five years.