Bought a house at end of Dec 2015 - how does it affect taxes?

[oharel]

We bought a house at the end of December 2015, but didn't begin paying P&I until January 2016. We put down a deposit and paid fees such as escrow, homeowners insurance, etc.

Is this taken into account in my tax forms in any way? Perhaps deductions of some sort? Thanks!

[Opus 17]

Some of your closing costs are itemized deductions on your 2015 return.  Whether you benefit depends on your total tax situation.

You likely paid daily interest from the closing date to the end of the month, shown on your closing statement.  That is deductible mortgage interest even if you don't receive a 1098.

If you paid points, they may be deductible.  Origination fees or points are a deductible form of mortgage interest IF they are a percentage charge of the loan amount and are not allocated to any specific fee or service (like a survey, bank attorney, etc.)  If you paid points, and provided cash at closing at least equal to the amount of points, and charging points is normal business in your area, then you can deduct the points in the year you close.  If not, you have to divide them out over the life of the loan (like, 360 months).

If you paid an upfront payment for mortgage insurance, and if you otherwise qualify to deduct mortgage insurance (not married filing separately, under the income limit) then you can deduct the up front PMI or MIP over the first 84 months of the loan.  The loan started at closing even though your payment didn't so you would take 1/84th now.  (Turbotax asks about mortgage insurance but does not do the 84 month calculation so you have to keep track yourself.)  If you paid a VA funding fee or Rural Housing Funding Fee, these are special forms of mortgage insurance that are deductible as a lump sum in the year you close.

You probably paid a property tax adjustment to the seller as part of the closing costs.  For example, the seller may have paid taxes last February, to cover the tax year January to December.  Since you took over the house before the end of the tax year, you paid the seller a credit for the paid in advance taxes to cover your ownership.  Those taxes are deducted as of the closing date as if you paid them to the city or county.  (This won't be much if your local property taxes are billed January-December, but if your taxes are billed July to June, then it could be a large sum.)

The rest of your closing costs are not deductible, but save your documentation because they increase your cost basis and may reduce your capital gains tax when you sell.

[oharel]

Thanks so much! So all the benefits are expressed only under the itemized deduction form? My wife and I are filing jointly - do we need to have a max AGI to benefit from these deduction (ie above a certain AGI can we no longer utilize these deduction)?

[Opus 17]

The deduction for mortgage insurance (PMI or MIP) starts to phase out at $100,000 adjusted gross income and is gone at $109,000 of AGI.  The other itemized deductions (mortgage interest, property taxes) don't have income limits.

The mortgage interest deduction is limited if you take out a home equity loan that is more than $100,000 OVER the purchase price of your house plus cost of renovation.  This was put in place during the real estate boom of the late 1990s-2000s when people were taking out huge equity loans based on market appreciation, but usually won't apply to a recent home purchase.

There is a general limitation on all Schedule A itemized deductions that gradually reduces the amount of deduction when your income goes over $309,000, but you still get a partial benefit.

[Opus 17]

On your next (2016) tax return, you will be able to deduct all the mortgage interest you paid this year, and the property taxes that were actually paid to the taxing authority.  (This may be different than amounts paid into escrow--money in your escrow account is still yours until it is sent to the tax authority.)  If your income is less than $100,000, you can deduct all of the PMI or MIP that is included in your monthly payment that you actually paid, plus 12/84ths of any up front lump sum you paid at closing.

[oharel]

Great info, thanks! So everything is taken into account solely on the Schedule A Itemized Deductions and not on any other form, is that correct?

[Opus 17]

Well, with taxes there is always a "but" (as in, yes but...)

Yes, schedule A is all you need, as long as this is your personal home.  But...if you start to use the home for business or a home office deduction, it gets more complicated.

And, if you make certain energy-saving improvements, you may qualify for a tax credit, and that uses a different form as well.

[oharel]

Well, I actually DO have a home office :>)

So that means that part of the mortgage numbers are reported outside the Schedule A, or does it mean that all mortgage numbers are still reported in the Schedule A but it is more complicated?

[Opus 17]

If you have a home office, then part of the property taxes and mortgage interest get allocated to your schedule C or form 2106 (depending on whether you are a W-2 employee or self-employed).

[oharel]

When you say "part of the property taxes and mortgage interest"- is it the same percentage as I would use when I use the home office vs house percentage rule for expenses such as electricity, etc?

[Opus 17]

Yes.  Turbotax should do this pretty much automatically.

[oharel]

No problem, thanks again!