Homeowners: Here's How to Take Advantage of Tax Deductions

The beginning of the year is always the time to reflect on the past and set expectations for the New Year. It is also time to start getting ready for filing your income tax.

While the Congressional Super Committee failed to come to consensus on how to reduce the national debt, homeowners can still look forward to deducting their mortgage interest on their tax returns. There are, however, some rules that must be followed to ensure that homeowners use all the allowable deductions and avoid an IRS inquiry. You will have to itemize your return to reap these benefits:

• Couples filing jointly can deduct the interest on properties with combined home loans up to $1 million; married and filing separately can claim interest on up to $500,000, as long as the money was used for acquisition costs—that is the cost to buy, build or substantially improve a home. 
• If your monthly mortgage payment includes money for a tax escrow from which your lender pays the real estate taxes, you may actually be paying more tax than what is due. The lender will carry over extra funds to pay the next year’s taxes. You cannot deduct the full amount, only the actual taxes that your lender paid. Use the amount on the 1098 Form that the lender provides.
• If you purchased a home in the middle of 2011, you cannot deduct all the taxes for the full year. Only the portion that is included in the HUD-1 statement can be deducted.
• Many homeowners have been able to refinance in 2011. You can deduct the points paid on the refinance, but the deduction is spread out on the life of the loan. If you refinance for a third time, the entire amount of points paid on the first refinance can be deducted.
• If you take out a home equity loan or HELOC for $150,000 that you don’t use to buy, build or improve your home, you can deduct the interest you pay on only the first $100,000 ($50,000 if married filing separately). If the entire amount of is used to improve the home, the entire amount of interest is deductible.

For additional information, consult the home mortgage interest deduction for preparing 2011 returns chart provided by the government.

As always, it is beneficial to consult a tax attorney or CPA for advice in filing you tax returns.

Joan Probala is a managing broker for Windermere Real Estate. She has 30 years of experience in real estate, construction and sales.