The tax advantages of taking out a home loan or mortgage

While most homeowners are probably somewhat aware of the tax advantages of owning a home, not everyone knows about the available breaks. A recent study shows that fewer than 30% of American taxpayers take advantage of deducting the mortgage interest from their Federal tax return, for instance.

There are other financial benefits to owning a home and they amount to a Federally funded subsidy for homeowners. If you are not taking advantage of these opportunities, you should. You are, in effect, leaving free money behind. And if you don’t take it, the government will probably just use it to fund something foolish.

So, the money is there for the taking if you want it. What are the tax breaks of financing your home? We’ll outline them below.

• Points are deductible. What are points? In real estate jargon, a “point” is one percent of the loan amount. Some loans have no points, but others add them at closing to cover a number of fees. You may pay so many points to lower your interest rate or they may be hidden in the mortgage under the guise of other fees, such as a “loan origination fee.” You may wish to check with your tax advisor if you are unsure if a particular item in your closing costs qualifies as a deductible point.

• As previously discussed, the interest on both your primary and secondary homes is tax deductible. We have discussed this issue in the past, as the importance of this deduction is often overstated. If you are in the 28% tax bracket, the interest you pay during the year will be deducted from your taxable income, resulting in an effective rebate of 28% of your interest. Be aware, however, that the amount of the interest you pay must exceed the standard deduction granted to every taxpayer by the Internal Revenue Service. If it does not, then you may not deduct the interest. You may only deduct that portion of the interest that exceeds the standard deduction. If you own two homes, however, you will almost certainly have enough interest that some of it is deductible.
• Property taxes are also deductible. Many taxpayers overlook this, especially the portion of property taxes that may be paid at closing. In some states, such as Texas and Florida, property taxes are relatively high, so this is not something to overlook when taking out a home loan.
• The interest on home equity loans is deductible up to $100,000. This may come in handy if you are planning to remodel or use your home equity for some other purpose.
• Hurricane Katrina victims may take some solace in knowing that if your home is damaged or destroyed, you may deduct any portion of the damage that is not covered by your insurance policy from your Federal tax return. It’s best to have adequate insurance, but if you don’t, this is a nice backup.

These tax breaks are often overstated. While it’s nice to get a 28% rebate on your interest paid, you are still paying out the other 72%. Keep this in mind should you find yourself in a position to retire your mortgage. It’s still much cheaper not to pay any interest at all.