Home loans can save you money on taxes

This time of year, people start to think about their taxes and how they can lower them before the calendar year ends. Most people start pondering deductions for purchases and expenses made by the end of the year which can be deducted when taxes are due in April. Below are a few tips as to how your home or home loan can help you save some money when tax time rolls around.

• Buy a house. Yes, buy a house. This is a “cold” time for real estate sales; most people, especially those with families, don’t want to relocate during the school year. That’s understandable, as no one wants to take children out of school while it’s in session. As such, the market for houses is slow and sellers are eager to get rid of their property. You might even find a bargain, which can be hard to find in the current housing market Some portions of closing costs are tax deductible, as is any interest you may pay on the loan before the year ends.

• Take out a home equity loan. The interest on your credit card balance isn’t tax deductible, but home equity loan interest is tax deductible. It’s a great time to take out a home equity loan and convert loans that aren’t tax deductible into loans that can work for you. Credit card loans and auto loans are good choices. Student loans probably aren’t, as the rates on those are pretty favorable.
• Don’t want to buy a house? Sell one! A change in tax law a few years ago eliminated the one-time tax exemption for couples over 55 of $125,000. The law now permits a tax exemption of $250,000 (or $500,000 for a married couple) every two years, provided you have been living in the home. This is a good time to sell as prices are high, and you can keep a great deal of the equity, tax free. If you’re not in that boat, and your gains will be taxable, wait until after the first of the year. Then the taxes become next year’s problem.
• Refinance your mortgage. If you still have a high-interest mortgage, you can refinance before the end of the year and deduct some portions of closing costs and any subsequent interest paid before the end of the year from your taxes. Interest rates have been rising, but they’re still pretty favorable. If you do refinance, it’s probably a good idea to look into a 30 year fixed rate loan.
• Make early mortgage payments. Your interest on your mortgage is tax deductible; if you make one or more payments that aren’t due until 2006 now, you can deduct that portion of next year’s interest this year. The more payments you can make early, the more you’ll save now.