Realtors are quick to point out that home ownership allows a lot of tax advantages not available to someone who merely pays rent.  A homeowner can deduct points used to obtain a mortgage when buying a home or second home, mortgage interest paid during the year, and property taxes.

Your Biggest Deduction - INTEREST - If you have a mortgage on your first or second home, the loan is probably “fully amortized”.  This means a portion of your monthly payment actually repays the debt and another pays the interest.  After a scheduled period of time your mortgage on your real estate, first or second home is paid off.

If you use itemized deductions using a Schedule A, the interest portion of your mortgage payment is usually tax deductible.  There are condition:  the first condition is that your primary residence or a second home must be collateral for the loan.

Defining Home- Your home can be a house, co-op, condominium, mobile home, trailer, log cabin, or ever a houseboat.  For trailers and houseboats, one requirement is that the home must have sleeping, cooking, and toilet facilities.  Even a rental can be considered a second home, provided you live in it either fourteen days out of the year or at least ten percent of the number of days you rent it for, whichever is greater.

Interest as a Tax Deduction- At the end of each year, your lender should send you a form 1098.  This form tells you how much you paid in interest and points during the year.  This is your deductible interest, provided you meet certain conditions.

If you obtained the loan prior to October 13, 1987, the loan is considered “grandfathered”.  All interest paid on grandfathered loans in a given year is fully deductible.  After that, there are conditions, but most conditions won’t apply to most homeowners or land owners.

Home Acquisition Debt (and IRS Term)- An important IRS term is “home acquisition debt”.   Any first or second mortgage used to buy a second home, build on real estate, or improve your home is considered to be home acquisition debt.

Acquisition debt can be a first or second mortgage used to buy your home.  If you get a second mortgage and use it all for home improvement, that is also considered acquisition debt.  If you do a “rate and term” refinance and don’t get any “cash out” - since you are just refinancing your home or real estate acquisition debt - that also can be considered acquisition debt.

For any of the above types of loans that aren’t “grandfathered” - you can still deduct all the interest- but only if your total mortgage debt does not exceed one million dollars.  For married couple filing separately, the limit is $500,000 each.

Home Equity Debt (another IRS Term) - The IRS has another term call “home equity debt”.  Basically, this is any loan amount in excess of what was spent to purchase a first or second home, build on real estate, or improve your home.  If you get “cash out” when refinancing your home, the amount in excess of your original loan amount is considered “home equity debt” - unless some of it was used for home improvement.  For second mortgages, it works the same way.

For the interest to be fully deductible, home equity debt cannot exceed $100,000 and the total mortgage debt on the home must not exceed its valve.  This can create a problem for those using 125% loan-to-value second mortgages to consolidate debt.  That portion of the loan amount that exceeds the value of your home is not tax deductible (unless you used it for home improvement on your first or second home).

Deducting Points When Refinancing - Points paid during refinancing must be deducted over the life of the loan.  For a thirty-year loan, you divide the points by thirty and you get to deduct that amount each year.

However, there is an exception.  If you did a “cash out”refinance and used some of the funds to improve your primary residence, a portion of the points are deductible in the year you paid them.  That portion is realted to how much of the loan was used for home impovement.  Save your receipts!

Deducting Property Taxes -Most homeowners pay property taxes to a local, state or foreign government.  In most cases, property taxes are deductible.  They must be charged uniformly against all property in the jurisdiction and must be based on the assessed value.

Many states and counties also impose property taxes for local improvement to property, such as assessment for street, sidewalks, and sewer lines.  These taxes cannot be deducted.  Local property taxes are deductible only if they are for maintenance or repair, or interest charges related to those benefits.

Impound Accounts -Many mortgages have impound or escrow accounts.  The borrower’s payment exceeds the amount necessary to pay the principal and interest.  The excess goes into an account used to pay property taxes, homeowner’s insurance and mortgage insurance.  When calculating your property tax deduction, don’t deduct what you pay into that account.  Only deduct what is paid from the account to the taxing authority.

Second homes are available in the Blue Ridge Mountains with an captivating view.

Penny Tow - Freelance Writer

Tips for First Time Home Buyers and those wishing to purchase a second Home - Buying a home can be a long, complicated and frightening process, and it is important to be prepared.  Knowledge is power when it comes to negotiating the difficult world of home prices, interest rates and mortgage loans.  For a first time home buyer and those wishing to purchase a second home (ex. Log cabins for a get-a-way home), there are many factors to consider before you buy.  The more information you can gather before you start shopping, the better off you will be.

Look Beyond the Price - When it comes to securing a quality mortgage loan, it is important to look beyond the interest rate to the true cost of the loan, both now and in the future.  Read the paperwork, including the fine print, carefullly, especially if the interest rate is below market rates.  Upon closer inspection you may find that the interest rate is guaranteed for only a short period of time, or that it is subject to rise sharply in the future.  Your mortgage loan may be the most important contract you will ever sign, and it is essential that you understand your rights and your responsibilities before signing on the dotted line.

Many communities provide some sort of first time homebuyer or those wishing to purchase a second home program designed to help renters become homeowners, purchase a log cabin as a get-a-way home, these organizations may be able to provide the legal advice you need at a price you can afford.

Every Situation is Unique - Every homebuyer will have a different set of circumstances, and it is important for the lender to consider those factors.  Some homeowners may plan to move in and live there a year or two, and they may be able to benefit from a variable rate mortgage.  Others will plan to remain in their home for decades, and those home buyers may benefit from the stability of a fixed rate mortgage and its predictable and stable monthly payment.  Some may wish to purchase a log cabin for a second home.

It is also important for those buying a first home to factor in the additional cost and the high price of private mortgage insurance.  Which can drive up costs and eat into funds that would otherwise be available for home improvements, furnishings and other essentials.  In some cases sellers may be willing to pay some of the closing cost, and some lenders will be able to negotiate those closing cost downward .  The key is to ask questions before the closing date arrives, and to be prepared to search for a better deal if necessary.

First time buyers should also be on the lookout for any hidden fees.  These small nuisance fees can add up to hundreds of dollars on closing day, so be sure to scour your paperwork for any such fees.  If you are unsure about the legitimacy of any charge be sure to ask for a valid explanation.  Again, an experienced real estate attorney can provide valuable insight into which fees are reasonable and which are out of bounds.

And of course first time home buyers should not lose sight of the home itself in the quest for the perfect mortgage.  Any defects should be pointed out to the seller well before the closing is to take place.  The costs of every needed repair should be carefully negotiated prior to the purchase, and buyers should always follow up to make sure that all requested repairs have been made.  A home is a major purchase, and it is important to make sure that everything has been taken care of before moving in.

Penny Tow - Freelance Writer