Congratulations on buying your first home! It may be a mobile home, a townhouse or a condominium. You can deduct many expenses which are related to your new home. Enjoy!
1. A handsome credit from IRS
If you are a first time homebuyer, then you may be able to claim a one- time tax credit of $7,500 ($3,750 if you are married and filing separately) or 10% of the purchase price of your home, whichever is smaller. You should have purchased your home in the United States after April 9, 2008 and before July 1, 2009. Also you should not own any home during a three year period ending on the date of purchase. If you have constructed your home, it is taken as your purchase on the date you occupied the home for the first time.
This credit is like an interest-free loan and it must be repaid over a period of 15 years. You must be a citizen or resident alien and you should not have any other home located outside the United States. You should not acquire your home from a related person and it should not be in gift or inheritance. If your modified adjusted gross income is more than $95,000 ($170,000 for people married and filing jointly), then you cannot claim this credit.
2. Interest on mortgage
These days, a major portion of the mortgage repayment goes towards interest in the first few years. All such interest is deductible from your income unless the loan amount is higher than $1 million.
3. Property taxes
The amount of property taxes you paid during the year can be claimed as a deduction in your tax return. When you buy your home, the tax payments for the year get divided between you and your seller. Your share is shown on the settlement sheet and is fully deductible. However, any amount paid towards future taxes is not deductible. This money is deductible even if you do not itemize deductions on your tax return.
There are certain items which you cannot deduct as real estate taxes. You cannot deduct the amount you paid for local benefits which tend to increase the value of your property. So expenses towards construction of streets, sidewalks, and water or sewer system are not deductible. Also any fee or charge for service provided by your local government is not deductible. You must have a close look at your real estate tax bill to find out any such charge.
Remember, certain itemized deductions (including the taxes and home mortgage interest) are limited if your adjusted gross income (AGI), is more than $159,950 ($79,975 if you are filing as married filing separately)
You need to keep full and accurate records to support your deductions and credits. These records include your contract of purchase and settlement papers. You should also keep receipts, canceled checks and similar papers for improvements or additions to your home. Generally these papers should be kept for a period of three years as per the IRS rules.