Make your home purchase now for tax purposes

By Melissa Wirkus

As the year is slowly starting to come to a close, many people are looking for ways to get a few extra tax breaks in.

One of the biggest tax breaks that Americans can indulge in is buying a home, and taking out a mortgage.

Mortgage interest is tax deductible, as well as loan points and various other things associated with homeownership.

Since we are currently in the midst of a buyer’s market, with a surplus of homes on the market and prices continuously falling, now is a great time to make the big purchase.

It is best to make a home purchase before the year’s end in order to reap in the tax benefits.

An October 13, 2006 article by Elizabeth Weintraub of About.com, “Closing a loan before year end could reduce tax bite,” looks into a few smart strategies for potential home buyers.

“Once October rolls around, it's not uncommon to see a lot of people scrambling, trying to find year-end tax breaks. Fortunately, for those who file U. S. tax returns, owning a home can help to significantly reduce your tax liability.”

“Mortgage interest, for example, is deductible from gross income. So are property taxes. In fact, if you close a real estate transaction before the end of the year, you will undoubtedly prepay some interest before your first payment is due, and that amount is deductible as well.”

In addition to all of these deductions you can make just from being a homeowner, loan points often time become one of the most confusing things for home owners to consider, both when applying them to their mortgage and when dealing with tax deductions.

“Planning to buy a new home around year’s end? Try to wrap things up by Dec. 31. The reward for meeting that deadline is a deduction for this year if you have to finance the purchase with a mortgage loan on which you pay ‘points.’”

Loan points are additional “up-front” fees that you pay on a mortgage instead of paying higher interest rates. Points also go by the names of “origination fees,” “premium fees” or “loan discounts.”

There are a few things that must be understood about points that qualify as a tax deduction.

“The key to points being 100 percent deductible in the year of payment, along with your other home-mortgage interest, is that you pay the points to obtain a specific type of loan.”

“It must be a loan to buy, build or improve (as when you add or remodel a room) your main home, that is, your year-round home, as opposed to, say, a second home that you use as a vacation retreat or property for which you charge rent.”

If you meet these few specifications, you could experience a much better tax experience when April 15 rolls around.

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