Benjamin Franklin said there were only two things in life that were certain…death and taxes. There are probably a few other things that are certain, and I’m fairly certain most people like to save on their taxes! If you are a homeowner, you are probably counting on a few 2012 tax breaks! Whether you made a home purchase during 2012, refinanced your home, you may be entitled to some tax deductions.
Here is a general overview of some information that may be helpful to you as you prepare your 2012 tax return:
Points Paid on a Home Purchase in 2012 – Item 803 on the HUD-1
If the adjusted origination charges on line 803 include points paid to your mortgage company in exchange for a lower interest rate, you can deduct those points in the year paid…even if they are paid by the seller.
Points Paid on a Mortgage Refinance in 2012 – Item 803 on the HUD-1
If the adjusted origination charges on line 803 include points paid to your mortgage company in exchange for a lower interest rate, you can deduct those points in the following manner:
You can deduct over the life of the mortgage all points paid on the portion of the mortgage proceeds that were not used for home improvements (for example, if you refinance your mortgage to reduce your interest rate but do not take any cash out for improvements).
You can deduct this year all points paid on the portion of the mortgage proceeds that were used for home improvements (if you received cash-out and are using that cash-out for home improvements). Remember, any points paid on the portion of the mortgage NOT used for home improvements must be spread out over the life of the loan. Example, if you refinance an old $200,000 mortgage into a new $300,000 mortgage and walk away with $100,000 to be used for home improvements, then 1/3 of your points are fully deductible this year and 2/3’s are deductible over the life of the loan.
Upfront Mortgage Insurance – Item 902 on the HUD-1
You can generally deduct upfront mortgage insurance on FHA and conventional loans over 84 months IF you qualify for the mortgage insurance deduction. However, you may be able to fully deduct the VA funding fee and/or the RHS guarantee fee on your 2012 tax returns, if:
You qualify for the mortgage interest deduction, and,
If your loan was guaranteed by the Veterans Adminstoration or the Rural Housing Service
Property Taxes (actual and pro-rated) – Items 106 and 107 on the HUD-1
Property taxes are generally deductible in the year they are paid. These are listed as items 106 and 107 on the HUD-1. Whatever you put into your escrow account for property taxes is listed as items 1004, 1005, or 1006 on the HUD-1. These are deductible in the year that your mortgage company pays them. Assessments are listed as item 108 on the HUD-1, and these are generally not deductible.
Prepaid Interest – Item 901 on the HUD-1
Mortgage interest is calculated in arrears. This means that your monthly mortgage payment actually covers the month that just ended. For example, your February payment covers the interest for the month of January, your January payment covers the interest for the month of December, and so on. Oftentimes, when you refinance a mortgage or buy a new home, you “skip” a months mortgage payment before the first payment is due. For example, if you closed your mortgage on June 15th, your first payment was not due until August 1st and you “skipped” July. This means your first payment in August collected July interest…but when did June interest get paid? At the mortgage closing on June 15th. At that time you were required to pre-pay the interest for the remainder of the month. That is what “daily interest charges” are included on ine 901 of the HUD-1 statement. If your mortgage interest is deductible, then anything you pay on line 901 is also deductible (this will be included in the 1098 statement that you receive from your mortgage company).
Owning a home allows you to deduct the interest you pay each month for your mortgage. There are some limitation for interest deductions for a home equity line of credit or home equity loan (aka Texas A6 in the state of Texas). The interest amount will be provided to you by the mortgage company on a 1098 statement. In order to take the deduction you must file a form 1040 and itemize deductions on Schedule A.
Previous Year Points Not Yet Deducted
You may be able to deduct the remaining portion of the original points paid on an existing mortgage if you refinanced it in 2012. For example, assume you bought a home 5 years ago and refinanced the mortgage 3 years ago. If you paid points on the refinance transaction, your probably were not able to deduct all the points you paid in the year they were paid. Instead, you had to spread that deduction out over the 30-year life of your mortgage. so, assume you’ve deducted 3/30ths of those points so far (3 years you have had the mortgage out of the 30 year life). If you refinanced that mortgage again in 2012, you can now deduct the remaining 27/30th of those old points not yet deducted. Keep in mind, this is in addition to the points you are eligible to deduct with the subsequent refinance of 2012.
Other Closing Costs
Closing costs not mention above are not tax deductible. However, they are added to your “tax basis” for purpose of calculating your capital gain when you sell the property. In other words, you may be able to reduce your capital gains tax (if applicable) when you sell the property in the future because your home purchase closing costs get added to your cost basis.
Qualified Residence or Investment Property?
Everything mentioned above pertains to a mortgage transaction involving a qualified residence. A qualified residence is a primary residence or a vacation home, if that vacation home is elected as a “qualified residence” for tax purposes. If your mortgage transaction involved an investment property, see IRS Publication 527 for more details.
And finally, please keep in mind the information above is intended for informational purposes and does not constitute legal, tax, or financial advice. Please be sure to consult with a qualified tax advisor for specific advice pertaining to your situation. And for further information on any of these topics above, please reference IRS Publication 936.