One of the single most useful ways to save money on your personal tax return is your home. Many people do not realize how extensively the government rewards home ownership, but the truth of the matter is this is one of the best deductions available. There are primarily two ways you can save tax dollars with your home.
Home Mortgage Interest
The first way is by utilizing the deductibility of home mortgage interest. In the early years of a mortgage, a large portion of the payment is going toward interest as opposed to the principal amount of the loan. Therefore, this is especially useful for individuals that are paying a lot in interest. It is also an added bonus knowing that all the extra money you pay on your home loan is not wasted.
Many structures will count as a home, including a boat, condominium, or mobile home as long as it has proper living accommodations such as a bathroom, sleeping area, and cooking facilities. Therefore, you may be able to claim your primary home and a boat for this deduction as long as the boat has the necessary features.
There are special requirements that must be met in order to be able to claim all of the interest you paid on a first or second home. To deduct the full amount of interest you pay, you must meet one of three conditions: all interest on the following will be fully deductible 1) a mortgage acquired prior to October 13, 1987; 2) home acquisition debt (including multiple properties) that totals less than $1 million ($500,000 if filing separately); or 3) home equity debt that totals less than $100,000 ($50,000 if filing separately).
You must be legally obligated to repay the loan and it must actually be secured by your home. Therefore, loans in other people’s names will not qualify, nor will loans that are not properly perfected in which a security interest does not exist.
Real Estate or Property Taxes
You may claim a deduction for real estate or property taxes paid to a taxing authority if the tax is based on the value of the property, is uniformly assessed, and is used for the beneficial purpose of the community or for governmental objectives.
You may only deduct taxes in the year they are paid; therefore, money paid into an escrow account is only deductible in the amount actually paid to a taxing authority. The property may only be used for personal use and may not have a business purpose.
Because the home mortgage interest and real estate tax deductions are deductions and not credits, they are not fully reimbursed on your taxes. Instead, they are used to reduce the amount of taxable income you have. Therefore, when you actually calculate it, you only receive credit for the amount of the deductions times your applicable tax bracket. However, even if you do not receive a dollar for dollar tax advantage, claiming these deductions can be very beneficial to you.