Red Letter Mortgage -- What Is Tax Deductible In the Loan Process

What is tax deductible in the loan process?

1. Home acquisition mortgage loan fees. If you bought your primary or second home in 2007, you probably obtained a mortgage to finance the purchase. That mortgage is called an “acquisition mortgage” because it enabled the purchase of the residence. If you paid a loan fee to obtain that acquisition mortgage, usually called “points” that loan fee qualifies as an itemized interest deduction. Each point paid equals 1% of the amount borrowed.

2. Home improvement loan fees. Similarly, if you paid a loan fee to obtain a home improvement loan, that loan fee is fully deductible in the tax year it was paid.

3. Loan fees paid to refinance a home loan (or borrow against other real estate). Thanks to low mortgage interest rates, many homeowners refinanced again in 2007. If you refinanced your existing home loan in 2007, or borrowed against other real estate such as an apartment building, any loan fee you paid is amortized and can only be deducted over the life of the loan.

4. If you bought or sold property in 2007, remember to deduct prorated real estate taxes. A major tax deduction many real estate buyers and sellers overlook is the prorated property tax they paid at the close of escrow. Even if the other party remitted the payment to the tax collector, but you were charged a prorated portion of the tax bill, be sure to deduct your share on your 2007 return. That amount can be found on your closing statement- or HUD1.

5. Deduct prorated mortgage interest in the year of property purchase or sale. Similarly, if you bought a residence and took over an existing mortgage, don’t forget to deduct your prorated interest share for the month of the sale. Your Final Closing/Settlement Statement shows your prorated share of the mortgage interest.

6. Mortgage prepayment penalty. If you paid off an existing mortgage early, and were charged a prepayment penalty by the lender, that prepayment penalty qualified as an itemized deduction.

7. When land rent payments qualify as interest deductions. Millions of homes are located on leased land. Internal Revenue Code 163 allows land rent to be deducted like interest when the lease; (a) is for at least 15 years, including renewal periods; (b) is freely assignable; (c) contains a present or future option to buy the land; and (d) is like a security interest, such as a mortgage. Payments to buy the land are not deductible, nor are ground rent payments deductible if you do hot have the option to buy the land, such as in a mobile home park.

8. Home construction loan interest. If you built a home in 2007, or are building one now, don’t forget to deduct the construction loan interest paid. It’s deductible if the construction period does not exceed 24 months before occupancy of your principal residence.

9. Deduct prepaid property taxes and mortgage interest. If you pre-paid 2008 real estate taxes in 2007, as homeowners do to increase their tax deductions, or if you pay your January 2008 mortgage payment in December 2007, don’t forget to deduct these extra mortgage interest and property tax payments on your 2007 income tax returns.