Paying Down Your Rate with Points – Tax Implications
If you are in process of procuring a mortgage to purchase a home in Yardley or Newtown, or any home for sale in Bucks County, it’s important to understand the tax implications of “buying down” your interest rate with pre-paid points.
Pre-paid interest, sometimes called “points”, can be tax deductible when a person pays them in connection with buying, building or improving their principal residence. Be aware however, that when you pay points on a refinance, they are not a current deduction, but have to be pro-rated over the life of the mortgage.
For example, if you pay $3,000 up front in points when refinancing a 30 year mortgage, you can deduct $100 per year. If you sell the home and pay off the mortgage, or you refinance again, the balance of any un-deducted points may be then deducted in that tax year.
You must inform your tax professional of any of these situations so that he can accurately reflect the deduction in your return. The most common situation today is where homeowners are refinancing their home for the second, third or even fourth time. If there are points that have not been completely deducted from these refinances, they need to be handled during the year of refinancing.
For more information, see the “points” topic in IRS Publication 936; there is a section on refinancing in this publication. Contact your tax professional for advice considering your specific mortgage situation.
If you already have yourself pre-approved for a mortgage and our looking to purchase a Bucks County home before the end of the year, then contact me to see some great homes!
Continue Reading > Add a Comment |Mortgage Interest Deduction – Will Homeowners Still Benefit?
Homeownership is supposed to be the American Dream, and the government has long supported offering tax advantages to homeowners. The question is: Will this tax benefit continue? With the government looking for more revenue, and mortgage interest being one of the highest dollar tax deductions, a change to the laws may be in our future.
As it Stands
Currently, homeowners are able to deduct interest on loans up to $1.1 million for first and second homes. The opinion is that this deduction is no longer necessary, and benefits mostly the wealthy, who are more likely to have multiple homes and large dollar mortgage loans.
Recent Proposals
In 2009, there were talks about allowing deductions for first homes only, and only for loans up to $500,000. In 2011, other ideas included eliminating the deduction all together and replacing it with a straight tax credit. Still more talks revolved around a mortgage interest deduction based as a percentage of adjusted gross income. President Obama’s 2013 federal budget proposes limiting the tax deduction for families with incomes over $250,000.
What it Means to You as a Bucks County Homeowner
During this election year, we can probably not expect to see too many strong opinions about changing or limiting the mortgage interest deduction. Most voters are homeowners, and politicians don’t want to ruffle feathers at this time. However, this issue will certainly be revisited as long as there is a continuing need for increased federal revenue. The effect on home values is yet to be determined.
I’ll continue to keep you updated on issues that affect you as a home buyer or home seller in Yardley, Newtown or anywhere in Bucks County, PA. Please contact me for more information about Bucks County real estate.
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Boost Your 2010 Tax Deductions By Making Your January Mortgage Payment A Little Bit Early
Looking for an extra 2010 tax deduction? Consider making your January mortgage payment a few days early.
It’s a simple strategy that works because of how mortgage interest works.
Unlike rent which is paid in advance at the start of a month, mortgage interest is only paid after it’s been borrowed. Your January mortgage payment, therefore, accounts for the interest that accrued in December.
And for a lot of Yardley homeowners, that mortgage interest is tax-deductible.
By making January’s mortgage payment in December, eligible homeowners can apply the interest paid to 2010′s tax returns instead of waiting to claim the same deduction against 2011. Don’t cut it close, though. It’s best to remit payment prior to the last week of the month, leaving your servicer ample time to receive and process your paperwork.
Most importantly, though, before prepaying on your mortgage, talk to your tax professional.
Not every homeowner is eligible for mortgage interest tax deductions, nor should every homeowner itemize their respective tax deductions. The “pay early” plan could be a wasted effort for you, ultimately, depending on your taxpayer profile.
If you don’t have an accountant that you trust, call or email me anytime; I’m happy to make a recommendation to you.
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