Are you aware that the interest on your mortgage can be deducted? Homeowners have been permitted to deduct interest on the initial $750,000 of their mortgage since December 2017. Simply claim the item on your tax return as an itemized deduction. Furthermore, it is possible to deduct the down payment in full if it originated from a deductible source, including a line of credit from another property, a second mortgage, or the refinance of another home.
Mortgage Interest
First, let’s look at how tax incentives for homeowners work. These are usually deductions or credits that reduce the amount of tax you owe the government. They may include deductions for mortgage interest, property taxes, and, in some cases, credits for energy-efficient home upgrades. The goal of these tax benefits is to promote homeownership, which is typically regarded as a stabilizing influence in communities and a cornerstone of the American Dream.
The mortgage interest deduction allows you to decrease your taxable income by the amount you spend on mortgage interest over the year. Keep track of your mortgage payments because your loan may benefit you at tax time. For example, if you obtained a $800,000 mortgage to purchase a home in 2017 and paid $25,000 in interest on that loan in 2023, you will most likely be able to deduct the entire $25,000 on your 2023 tax return. However, if you have a $800,000 mortgage in 2023, your deduction may be reduced. This is due to the 2017 Tax Cuts and Jobs Act, which limited the deductible to the first $750,000 in mortgage interest.
For you, the homeowner, the immediate benefit is obvious: tax incentives can make buying a property more affordable. The mortgage interest deduction, for example, lets you decrease your taxable income by the amount of interest you pay on your mortgage each year. Given that interest payments can make up a large amount of your initial mortgage payments, this can result in significant annual tax savings.
There are some items that do not qualify. These include homeowners’ insurance, any additional principal payments made on your mortgage, title insurance, settlement charges (for the most part), deposits or earnest money forfeited, and any interest accrued on a reverse mortgage.
Deductions for the Down Payment
Down payments are generally not tax deductible, although they can be if they originate from a deductible source. Because the down payment is part of what secures the loan, the feed linked with it can be deducted. If you borrowed money for a down payment from a deductible source, you can claim the deduction in the year that the mortgage interest is paid. You can also deduct any closing fees that were not paid out of pocket. However, be mindful that any down payment monies received from a retirement plan are taxable as income.
As you can see, there are numerous taxable benefits available to homeowners; nevertheless, the process can be cumbersome, and there are always limits and exceptions. If you have any questions, the InterWest Mortgage staff has the experience and understanding to assist you determine whether benefits apply to you.
