There are at least four ways by which you can claim federal income tax deductions arising from your home ownership. You can deduct your mortgage interest, property tax, private mortgage insurance and a portion of your closing costs from your taxable income.
Mortgage Interest
You may be able to deduct all or part of the interest you’re paying on your mortgage depending on your loan amount and your loan type. This amount can be substantial in the initial years of your loan as the bulk of mortgage interest is charged during the first years.
You can claim a mortgage interest deduction if you’re not using the standard deduction, meaning you’re itemizing your deductions. Your loan must also be a first or second mortgage, a home equity loan, or a home improvement loan and the house involved must be your primary or second home. Only the mortgage interest scheduled and paid during the tax year is considered for deduction for the same year of tax payment.
Residential Real Estate Tax
You can add to your federal income tax deductions the residential property tax you paid to your state or local tax collectors. To be considered for deduction, the tax must be based on the appraised value of the house, must be used for the good of the public, must not be a payment for service rendered, and must be charged with a uniform rate by a taxing authority. You can claim this deduction by filling out line 6 of Form 1040. If you’re not itemizing deductions, you can still claim 500 U.S. dollars as tax deduction, or 1,000 U.S. dollars if you’re filing jointly with your spouse.
Private Mortgage Insurance
PMI is an insurance that you purchase to protect your lender’s money in case you default. This is required by most lenders if your down payment is less than 20 percent of the home sales price. Typically, the cost of PMI ranges from 0.15 percent to 2.5 percent of the loan amount. If you purchased a PMI, you can deduct the total premiums you’re paying for the year on line 13 of IRS Form 1040.
Part of Closing Costs
You can deduct the discount points you purchased to lower your mortgage rate depending. You can also deduct local transfer taxes in your income tax return or deduct home inspection and appraisal costs from your capital gains tax when you sell your home. There are at least nine requirements for you to be able to claim deductions for points paid, including basis of computation of points and the general practice related to buying points in your area. You can make your deductions for points on line 12 of IRS Form 1040.
In summary, to claim the tax deductions, you must file IRS Form 1040 and itemize your deductions. If you itemize deductions, you cannot apply the standard deduction.