Every person dreams of owning a house someday. However, owning a house requires applying for loans and mortgage. Once approval for loans and mortgage is received, new homeowners have to start the process of re-payments. Although these re-payments are often liabilities, they can also qualify new homeowners for several tax breaks. This reduces the tax liability. However, these tax liabilities are not deducted from the taxable income of homeowners by default; instead, homeowners will need to claim these deductions in their tax filing. These deductions can help a lot in reducing tax liability, which in turn means that the money saved can be put back into the loan repayments. Here are 4 useful tax deductions.
Property Tax
Any real estate that you buy will attract property tax. For a first-time home buyer, when the real estate has been made with a loan, the property tax to be paid for a particular year is collected in advance by the lender along with regular loan repayments. These monthly payments are set aside by the lender and paid once a year. If your home loan has this kind of arrangement, the property tax payments made by you are eligible for tax deductions.
Mortgage Insurance
For all home loans for which the down payment paid by the borrower is less than 20% of the loan amount, a private mortgage insurance needs to be paid. This is an insurance paid for by the person who has taken the home loan, but it is used to protect the lender in case the borrower defaults on payments. This sounds pretty unfair to the borrower, but there is a silver lining here. The amount paid as private mortgage insurance can be claimed as a tax deduction too.
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Earning points
Some lenders offer borrowers a system of earning points. This involves payment of an amount of around 1% of the loan amount to get one credit point. The more points the borrower collects, the lower is the interest rate charged on the home loan. The cost of redeeming these points can be added to the list of tax deductions.
Mortgage Interest
This one is listed last here because most homeowners know about it and do not miss out on claiming it. As you start repaying your loan, the majority of your monthly repayment first goes toward paying the interest, and a small amount goes toward reducing the principal amount of the loan. As the loan becomes older, this ratio is inverted. The principal repayment increases and the interest repayment decreases. Because interest payments are eligible for tax breaks, the first few years of a home loan are good for claiming sizeable tax deductions.
A homeowner can apply for all of the above four tax deductions or a combination of these while filing tax returns. Although this may involve additional work for you during the tax filing season, it will pay off in the long run. These deductions can help in reducing the financial burden of repaying loans and mortgages.
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