Homeownership has always been the great “American dream”, a concept deeply rooted in the aspirations of many families across the country, including those in Virginia looking to invest in their future. To foster and encourage this dream, Congress has consistently enacted tax legislation that favors homeowners. Indeed, much has been written that our tax laws discriminate against renters, by giving unfair and unequal tax benefits to those who own homes.
Every four years, some candidate for high political office tries to focus our attention on equalizing the tax laws and repealing the homeowner benefits, but these arguments have consistently fallen on deaf ears. And this coming election year is no different.
For those of us who own homes, especially for military families in Virginia and those interested in coastal Virginia homes, here is a list of the itemized tax deductions available to the average homeowner. Every year, you are permitted to deduct the following expenses:
Taxes
Real property taxes, both state and local, can be deducted. However, it should be noted that real estate taxes are only deductible in the year they are actually paid to the government. Thus, if in year 2015, your lender held in escrow moneys for taxes due in 2016, you cannot take a deduction for these taxes when you file your 2015 tax return. Chesapeake real estate agents often remind their clients that mortgage lenders are required to send an annual statement to borrowers by the end of January of each year, reflecting the amount of mortgage interest and real estate taxes the homeowner paid during the previous year.
Mortgage Interest
Interest on mortgage loans on a first or second home is fully deductible, subject to the following limitations: acquisition loans up to $1 million, and home equity loans up to $100,000. If you are married, but file separately, these limits are split in half. Chesapeake home sales professionals frequently advise understanding the concept of an acquisition loan. To qualify for such a loan, you must buy, construct, or substantially improve your home. If you refinance for more than the outstanding indebtedness, the excess amount does not qualify as an acquisition loan unless you use all of the excess to improve your home. However, any other excess may qualify as a home equity loan.
Let us look at this example:
Several years ago, you purchased your house for $150,000 and obtained a mortgage in the amount of $100,000. Last year, your mortgage indebtedness had been reduced to $95,000, but your house was worth $300,000. Thanks to low rates last year, ideal for those considering Virginia real estate investment, you refinanced and were able to get a new mortgage of $175,000. Your acquisition indebtedness is $95,000. The additional $80,000 that you took out of your equity does not qualify as acquisition indebtedness but, since it is under $100,000, it qualifies as if it was a home equity loan—a common scenario for military family homes in Virginia seeking to leverage their home’s value.
Several years ago, the Internal Revenue Service ruled that one does not have to take out a separate home equity loan to qualify for this aspect of the tax deduction. However, if you had borrowed $200,000, you would only be able to deduct interest on $195,000 of your loan—the $95,000 acquisition indebtedness, plus the $100,000 home equity. This information is particularly relevant for those involved in Chesapeake home sales, where property values can lead to significant refinancing opportunities. The remaining interest is treated as personal interest and is not deductible. This example underscores the importance of consulting with a Chesapeake real estate agent or financial advisor to maximize tax benefits related to homeownership and investment in the area.
Points
When you obtain a mortgage loan, some lenders will allow you to pay one or more points to get that loan. The more points you pay, the lower your mortgage interest rate should be. Whether referred to as “loan origination fees,” “premium charges,” or “discounts,” these are still points. Virginia real estate investment strategies often include paying points upfront to reduce long-term interest expenses. Each point is one percent of the amount borrowed; if you obtain a loan of $170,000, each point will cost you $1,700. The IRS has also ruled that even if points are paid by sellers, they are still deductible by the homebuyer. Points paid to a lender when you refinance your current mortgage are not fully deductible in the year they are paid; you have to allocate the amount over the life of the loan. For example, you paid $1700 in points for a 30-year loan. Each year you are permitted to deduct only $56.66 ($1700 divided by 30); however, when you pay off this new loan, any remaining portion of the points you have not deducted are then deductible in full.
Earl Sanders Realty
If you have any questions about these tax benefits, especially how they pertain to Virginia real estate investment or military family homes in Virginia, discuss them with your financial and legal advisors. Don’t have any? Contact us and we’ll be happy to connect you with a professional real estate agent we trust! Call Now at: (757) 992-9282
