Unit 4 : Lesson 2: Planning for monthly expenses in your new home

Tax advantages

If you have a mortgage loan, each year you can deduct the interest you pay on your loan from your federal income taxes if you itemize your deductions. If you paid points at closing, you may also deduct these from your federal income taxes. In addition, you may also deduct the amount you pay for local real estate taxes.

For example, if you are paying 10 percent interest on an $80,000 mortgage payable over 30 years, your total monthly payments of principal and interest for the year equal $8,424. In the first year of the loan, you will pay the lender $7,944 in interest and only $480 in principal. This means you may be able to subtract $7,944 from your income that year, if you itemize your deductions.

In addition, you pay homeowner’s insurance and real estate taxes as part of your monthly mortgage payment. You can usually deduct your local real estate taxes from your federal income taxes. However, you cannot deduct your homeowner’s insurance.

Be sure to keep records of any improvements you make on your home. For example, if you build an additional bathroom, keep all of the bills for the work. Although you cannot deduct these expenses from your taxes, the home improvements may lower the amount of taxes on your profit when you sell the house.

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