A financial benefit of home ownership is that some of the costs are tax-deductible. In order to deduct those expenses, the exact amount of the outlays must be determined. After purchasing a home, individuals can plan ahead for tax preparation by knowing what supporting documents are needed to obtain the information necessary for deducting interest and taxes.
Personal tax deductions for home ownership are itemized deductions. The cost of interest paid on a mortgage is often the largest single deduction for tax filers who itemize. When mortgage interest is added to all other potential itemized deductions, the total may exceed the applicable standard deduction for your filing status. In that case, you are better served by not taking the standard deduction and claiming your itemized deductions instead.
Itemized deductions are reported on IRS Schedule A. There are several categories of allowable itemized deductions, two of which are interest paid and taxes paid. Determining some of the deductible amounts may require some calculations on your part, but other amounts can be derived directly from an annual form sent to mortgage holders.
Form 1098 for mortgage interest
A mortgage company that receives $600 or more in interest during a year from a borrower is required to send that mortgage holder an IRS Form 1098. The amount of interest reported on Form 1098 is then entered in the designated section of your Schedule A. If you have a seller-financed loan, there may be no Form 1098 to use. For that situation, there is a separate entry line on Schedule A to enter the amount of interest paid on a seller-financed mortgage.
Form 1098 for property tax
Each Form 1098 also contains an entry box for property tax paid by your mortgage company out of an escrow account. The exact amount that you pay into an escrow account for property tax may differ slightly from the amount actually reported on Form 1098. You are likely to also receive a property tax notice from your county of residence, reflecting the same correct amount of tax as reported on Form 1098.
Local property tax notice
If you pay your property tax directly, the deductible amount can be derived from the county tax bill. The county tax notice is not a standard IRS form, so the layout of the information varies somewhat from county to county. Once located, you might prefer to go ahead and draw a circle around the exact amount of property tax paid. Contact a real estate firm for more advice on homes for sale in your community.