Buying a home can be another major life event that affects your income tax return. The topics covered in the Bought a Home Life Event below are:

If you took out a loan to purchase your home, you probably have to make monthly house payments. The amount you pay each month will cover several different costs of owning your home. Typically, the largest portion of each payment goes toward the interest charged on the funds borrowed to purchase the home. A small part of each payment will also be a repayment of the money borrowed. 

Also, most financial institutions will require you to make monthly payments of property taxes and insurance with each payment. The financial institutions accumulate the monthly tax and insurance amounts. The insurance company and the appropriate taxing authority are then paid by the financial institution when the amounts are due. This forced savings to cover expenses is a procedure called "Escrow".

Deductible Expenses

Mortgage Interest
Usually, you may deduct the entire amount of your monthly house payment that is for mortgage interest. There may be limits applied if your total mortgage balance exceeds $1,000,000 or if you took out the mortgage for reasons other than to buy, build, or improve your home.

If you paid more than $600 of mortgage interest during a year, you should receive a Form 1098 Mortgage Interest statement from the lender providing the total interest that you paid during the year.

If your mortgage holder charges you a late payment charge, you may deduct the extra charge as mortgage interest provided that the charge was not for a specific service provided by the mortgage holder.

Taxes
Most state and local governments charge an annual tax on the value of real property. This is called a real estate tax. You can deduct the real estate taxes that are imposed on your home and that you paid during the year. If your bank or lender includes property taxes in your monthly payment, you will only be allowed to deduct the amount that was actually paid to the taxing authority, not the full amount that you have paid in with the monthly payments.

When you purchase a home, the property taxes that are due for that year will be prorated between the purchaser and the seller. If you were given a prorated credit against the purchase price of your home, you cannot deduct the Real estate taxes which you paid. 

Prorated taxes
The purchase price of the home will be reduced by the amount of the real estate taxes that the purchaser will end up paying for the seller. Even though the purchaser will end up paying the full amount in the first year, they may only deduct on their tax return the portion that actually relates to the period of time that they owned the home.

Example: You purchase a home on September 1 that has an annual property tax bill of $1200. In your area, the property taxes are assessed on a calendar year and are due by May 1 of the following year. At the closing, you should receive a credit of $800 for the sellers share of the property taxes for the year. On May 1, you will have to pay the full amount, $1,200. You will only be able to deduct the $400 which relates to the period that you owned the home.

Insurance
The cost of insurance coverage for your home is not a deductible expense. This would include coverage for fire, comprehensive damage, title, and mortgage insurance. 

Many lenders will include the monthly cost of insurance in your house payment. The portion of your house payment for insurance will not be deductible.

Points
The term "Points" is used to describe certain charges paid or treated as paid by a borrower to obtain a home mortgage. Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points. Generally, you can fully deduct the points in the year paid as interest if:

1. your loan is secured by your main home, or
2. you used the loan to buy or build your main home, or 
3. the points were computed as a percentage of the principal amount of the mortgage, or
4. the funds you provided at or before the closing plus any points paid by the seller were at least as much as the points charged.

Nondeductible Expenses

Closing Costs
Most closing costs are not deductible and are added to the cost of your home. They include:

Home Improvements
The cost of home improvements are not deductible as expenses. The cost of home improvements that add to the value of your home, prolong it's useful life, or adapt it to new uses can be added to the cost of your home. 

The interest paid on a loan obtained to make home improvements would be deductible.

Home Maintenance
The ordinary expenses of maintaining your home in good repair are not deductible on your tax return. Expenses that keep your home in good condition, but do not extend the life or add to the value of the home are not deductible. These maintenance expenses are not included in the cost basis of your home to be used in determining the gain or loss on the sale. 

Examples of maintenance items are:

Moving Expenses
The cost of moving your household items to a new home will only be deductible if it is also related to a change in your job. To be deductible, the move must be at least 50 miles. The distance from your new home to your old work place must be at least 50 miles further than the distance from your old residence to your old work place.

If you did not move at least 50 miles, the cost of moving is not deductible. Also, you must move within one year of changing work locations. For more information, see the Life Event - Changing Jobs.

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