Wednesday, February 28, 2007

Tax Tips for Homeowners

Make sure you take advantage of every break the IRS will give. Here are a few:

Points: According to the IRS, points must paid for the use of money, (for example, to obtain a lower interest rate) in order to be tax deductible. Origination fees that constitute a "service fee" are not tax deductible. IRS Publication 936 lists a general rule that states, "You generally cannot deduct the full amount of points in the year paid. Because they are prepaid interest, you generally must deduct them over the life (term) of the mortgage." However, there are conditions which, if met, make discount points tax deductible in the year they are paid. (For more details on points and deductions, see http://www.irs.gov/publications/p936/ar02.html#d0e942.)

Pre−payment penalties: Sometimes, circumstances cause you to pull out of your mortgage sooner than expected. Fortunately, pre−payment penalties are tax deductible, which helps ease the pain.

Pro−rated real estate taxes: Even if the seller sent the tax collector the check, chances are you paid a pro−rated portion of the taxes for the year at closing.

Pro−rated mortgage interest: Depending on when in the month the home sale closes, you will pay either a hefty or a tiny amount of pro−rated mortgage interest for that month. Big or small, you can write that off. The Final Closing/Settlement Statement will show just how much they're due.

Home construction loan interest: As long as the construction period doesn't last more than two years before you make the new place your "principal residence," you can write off the interest for that construction loan.

It pays to pay attention—all these write−offs can add up to some serious savings when tax time comes around.

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