April is here and you know what that means… it’s Tax Time!
In this post, I’ll give an overview of the items homebuyers in 2017 can write off when filing taxes.
Fun fact before we get started: the filing deadline for Federal taxes is April 17th this year. April 15th falls on a Sunday and April 16th is Emancipation Day, which is holiday in Washington, D.C.. So to all you procrastinators out there… two extra days to delay the inevitable.
Please note, what follows is for informational purposes only. Make sure you get your legal and tax advice from a qualified tax advisor… not me! Or go straight to the source, IRS has more information on much of what is below in Publication 936.
Gather the right documents
As you prepare to file you 2017 tax returns, you’ll want to have a few key documents on hand:
Final Closing Disclosure (CD) – This document is where you’ll find all the fees paid in connection with your closing. It’s one you’ll want to keep around even after you file taxes — it’s a great place to reference all the key terms of your loan. If you can’t find it, you can request a copy from the title company that handled your closing or your lender. You will have received at least two versions of your CD, so make sure you work from the one marked “final”.
Form(s) 1098 – Each lender to whom you paid mortgage interest will have issued a 1098 form. This is the document showing the mortgage interest you paid — and possibly property taxes and mortgage insurance. It should have been sent to your address of record in late January. However, this year you may have received a revised 1098 form in February. The budget bill passed by Congress in February included a retroactive stipulation allowing homeowners to deduct mortgage insurance paid in 2017. (Yeay!) If your loan includes mortgage insurance, make sure you work from the 1098 form with mortgage insurance on it when filing.
Property Tax Statement – If your mortgage includes an “escrow” for property taxes and homeowners insurance, your 1098 form and CD will include all the real estate taxes you paid. If you pay taxes on your own, you’ll want to have a copy of your tax statement handy. Tax statements are easy to pull up at your County Tax Assessor’s site. I’ve provided links to many of our regional assessors’ offices here.
Home Business Use Records – If you used a portion of your home for business use or offer daycare in your home, you’ll want to round up records for all of your expenses related to your home business use. The IRS publication 587 is a great place to start. Note that writing off home business use can complicate your tax situation when you sell your home.Mortgage Credit Certificate (MCC) – If you were lucky enough to score a Mortgage Credit Certificate in connection with your mortgage, now is when you’ll see the magic happen.
Itemized versus Standard Deductions
You will claim either a Standard or Itemized deduction on form 1040. You’ll want to claim whichever is bigger, as the deduction is, well, a deduction. You only have to pay tax on your income left over after being reduced by the deduction… bigger is definitely better.
In December 2017, Congress passed a tax overhaul bill that significantly changed the standard deductions, but the changes didn’t kick in until 2018. So when filing 2017 taxes the “old” amounts still apply:
- $6,350 for single filers
- $12,700 for married filers
- $9350 for heads of household
If you can find enough itemized deductions to exceed the applicable amount above, then you’ll file a Schedule A (and maybe some other supporting forms) listing them out. For information on the non-home-related things you can itemize in 2017 click here.
Note: if you hold a Mortgage Credit Certificate, you may be able to get tax benefit from owning your home, even if you don’t itemize.
Itemized deductions from your home
So what are the itemized deductions you can claim in connection with your home on your 2017 tax filing? So glad you asked. Here is an inventory, along with where to find these figures in the documents you’ve gathered up.
Points paid on a home purchase in 2017
Closing Disclosure Page 2, Section A – If your origination charges on Page 2, Section A of your CD include points paid to lower your rate, you can deduct those points, in full, the year you paid them. Amazingly (to me anyway), this is true even if the seller paid them for you. Note that the only deductible costs in this section are “bona fide” points that are a percent of your loan.
Points paid on a mortgage refinance in 2017
Closing Disclosure Page 2, Section A – For refinances the rules with regard to deducting points depend on the purpose of the money you borrowed. You can deduct, in full, the points you paid on the portion of the loan that went to home improvements. Points paid for money borrowed that did not go to home improvements (if you refinance to lower your rate, for example), can be written off, but must be spread out over the life of the loan. On a 30 year loan, for example, you can write of 1/30 of these points each year. And, as above, you can write off bona fide points only… not the other fees in this section.
Property taxes (actual)
Closing Disclosure Page 2, Section F and/or form 1098 and/or property tax statement – Look in here for the property taxes you paid at closing. Note, do not include the taxes listed as being deposited into “escrow”. You can only write off taxes when you pay them. Funds going into escrow are being set aside to pay taxes at a later date. Your lender will report the amount paid out of your escrow account, to the county, for taxes on form 1098.
If you pay property taxes yourself, outside of your loan payment, you’ll need to check your records to verify the timing and amount you paid. Taxes paid during 2017, can be written off in 2017.
Property taxes (prorated)
Closing Disclosure Page 3, Section K – Look here for the amount of taxes you paid back to your seller, if applicable. In both Oregon and Washington, the due dates for property taxes require you to pay taxes partially in advance. If your closing happens at certain times of the year, you will pay the seller back for taxes they paid for days you own the home. In Oregon, this window of time runs from November to June. In Washington, this happens during May, June, November and December. You can write off the prorated amount you paid to the seller.
Closing Disclosure Page 2, Section F and form 1098 – Mortgage interest is calculated in arrears. This means every time you write a mortgage check, you are actually paying the interest for the prior month. Although this is the opposite of rent, which is paid ahead, it makes sense if you think about it; you are paying interest, so time has to pass for the interest to accrue–only then does it come due.
The exception to this rule, comes at closing. When you close on a home loan, you will generally pay all of the interest for the month of closing, at closing. You pay a prorated amount starting the day you close until the end of the month in which you close. The result is that you get the feeling of “skipping” a payment the month after closing (since you already paid the prior month’s interest, when the first of the next month rolls around).
Even though you paid this interest ahead, it is still deductible.
Form 1098 – The 1098 form your lender sent to you includes all of the interest you paid during the year (prepaid at closing and in your monthly payments). If your loan servicing was transferred from one entity to another or you refinanced you may have 1098 forms from more than one lender. Make sure you collect them all, so you don’t miss out on writing off any interest.
Previous year points not yet deducted
Old Closing Disclosure or HUD-1 (and prior years’ tax forms) – If you refinance a mortgage in 2017, you may be able to deduct any remaining portion of points you paid on an old mortgage. Let’s say you refinanced in 2014 and again in 2017. You have likely been writing off 1/30 of the points paid in 2014 over the past three years. That means you still have 27/30ths left. You can now deduct those remaining points this year.
Closing Disclosure and/or Payoff statement – It’s not common, but if you refinanced a loan in 2017 and paid a prepayment penalty on the old loan when doing so, you can write off the penalty, so long as your new loan is with a different lender than the old loan.
Other closing costs
Closing Disclosure – Closing costs not mentioned above cannot be deducted on this year’s taxes, but keep good records. When you sell your home, you may be subject to “capital gains tax” (tax on the profit of the sale of an asset). You only pay tax on gains that exceed your “tax basis” in the property. The closing costs you were not able to write off can be added to your “tax basis”, reducing the profit on which you pay tax. Note: You may be eligible for an exemption on some or all of capital gains on the sale of your primary residence (more from the IRS here), but it’s best to have these records, just in case!
Mortgage Credit Certificate
If you got a Mortgage Credit Certificate with the purchase of your home (you lucky devil, you!), your mortgage interest write-off will probably wind up in two places… and one of them can turbo-charge your tax savings. With an MCC, so long as you still live in your home and keep the same loan, 20% of your interest can be deducted from your Federal tax bill for the year (limited by the amount of taxes you actually owe). The other 80% of interest paid will be part of your itemized deductions on Schedule A. You have a new favorite tax form: form 8396. You never had a favorite tax form before? You do now!
An important caveat is that everything above pertains to homes and mortgages secured to primary and vacation homes that are selected as a “qualified residence” for tax purposes. If your property is considered an investment property different rules apply (check out IRS publication 936 for more).
Disclaimer redux and referrals
I hope you found this a helpful primer on world of taxes as related to buying, owning or refinancing a home in 2017. As mentioned above, I’m definitely not an expert when it comes to tax-related matters, so please make sure you get all of your legal, tax and financial advice from qualified professionals. If you want some help finding a qualified professional to weigh in on any part of your financial life, please reach out. I have a list of terrific folks I’d be happy to share.
Back to our regularly scheduled programming
Of course, I am a qualified professional when it comes to all things mortgage. If you have questions about buying or refinancing a home, my team and I are here to serve you and yours. Reach out whenever we can be of service and, please, send your friends and family our way. You can find us, check rates, research loan options and apply online at www.rate.com/juleef.
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