We find ourselves in April already, and while April is known for many things (the first full month of baseball, the start of basketball season, usually Easter), many associate it with taxes being due. Orion wants our brokers to know that for borrowers, even if they can’t deduct all their closing costs, the U.S. tax code still encourages people to buy homes through the mortgage interest and property tax deductions. As always, it is best for your client to consult with a tax preparer or the actual tax code about actual taxes, but there are some things a broker can add value by knowing.
The only mortgage closing costs one can claim on a tax return for the tax year in which your client buys a home are any points they pay to reduce their interest rate and the real estate taxes your client might pay upfront. Homeowners can writeoff the interest they pay on their mortgage loans each year, as well as the property taxes they pay to local municipalities.
Buyers can’t deduct most of the fees their lenders charge when closing their mortgage loans. In general, any closing costs, typically paid to lenders such as a broker or Orion, and other third parties such as title insurance providers, are not deductible. Two exceptions are any points to “buy” to reduce a loan’s interest rate, and any property taxes paid in advance. Mortgage points are “purchased” to lower the interest rate on mortgages, with each point costing 1% of their total loan amount. The IRS allows your client to deduct the full amount of points in the year borrowers pay for them. To claim this deduction, the mortgage must be used to buy or build a primary residence. There may be other restrictions, so your client should talk to a preparer or consult the tax code.
Tax deductions are items that can be claimed on one’s federal tax return to reduce taxable income, and two of the more valuable deductions are related to homeownership. The mortgage interest deduction allows your client to deduct the interest paid on a mortgage each year. Your client can deduct a total of $1 million or $750,000 in interest depending on whether they bought the home before or after December 16, 2017. They can also deduct the property taxes paid each year, up to $10,000.
Should your client eventually sell the home, and hopefully use a broker to finance a new one, items like abstract fees, legal fees (including fees for the title search and preparation of the sales contract and deed), recording fees, owner’s title insurance, and credit check fees add to the “cost basis” in the home and therefore can be subtracted from any profits for tax purposes. In other words,your client can add these closing fees to the cost basis of the home when they sell it, thus reducing any capital gains tax they might have to pay. (When one sells a home, the seller won't have to pay capital gains taxes on the first $250,000 of the sale if they are single or $500,000 if married.)
Everyone’s taxes are different, but these are the basics, and certainly remind us of why home ownership is better from a tax perspective than renting! Your role as a broker is to remind clients of these factors!