Tax Season and VA Loans: Mortgage Interest and Real Estate

It's tax time again, and homeowners that have a VA home loan or other home mortgage product may be eligible for allowed deductions per IRS Publication 530. For most, homeownership affords tax advantages that allow the homeowner to keep more of their hard earned money. Homeowners that are members of the Armed Forces may also qualify for tax credit extensions if they meet the criteria.

Below are some common homeownership tax deductions as well as the buyer homeownership tax credits for eligible members. For information specific to your tax situation please consult a licensed tax professional or visit www.irs.gov for more details.  

Mortgage Interest

Most home buyers take out a mortgage (loan) to buy their home. They then make monthly payments to either the mortgage holder or someone collecting the payments for the mortgage holder.

Usually, you can deduct the entire part of your payment that is for mortgage interest, if you itemize your deductions on Schedule A (Form 1040). However, your deduction may be limited if:

  • Your total mortgage balance is more than $1 million ($500,000 if married filing separately), or
  • You took out a mortgage for reasons other than to buy, build, or improve your home.

Points

The term "points" is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. Points also may be called loan origination fees, maximum loan charges, loan discount, or discount points. A borrower is treated as paying any points that a home seller pays for the borrower's mortgage.

General rule

You cannot deduct the full amount of points in the year paid. They are prepaid interest, so you generally must deduct them over the life (term) of the mortgage.

Exception.   You can deduct the full amount of points in the year paid if you meet all the following tests.

  • Your loan is secured by your main home. (Generally, your main home is the one you live in most of the time.)
  • Paying points is an established business practice in the area where the loan was made.
  • The points paid were not more than the points generally charged in that area.
  • You use the cash method of accounting. This means you report income in the year you receive it and deduct expenses in the year you pay them. Most individuals use this method.
  • The points were not paid in place of amounts that ordinarily are stated separately on the settlement statement, such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes.
  • The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. The funds you provided do not have to have been applied to the points. They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. You cannot have borrowed these funds from your lender or mortgage broker.
  • You use your loan to buy or build your main home.
  • The points were computed as a percentage of the principal amount of the mortgage.
  • The amount is clearly shown on the settlement statement (such as the Uniform Settlement Statement, Form HUD-1) as points charged for the mortgage. The points may be shown as paid from either your funds or the seller's.

Real Estate Taxes

You can deduct real estate taxes imposed on you. You must have paid them either at settlement or closing, or to a taxing authority (either directly or through an escrow account) during the year.

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