THE MORTGAGE BROTHERS SHOW

Episode 2: What Parts of a Mortgage Are Tax Deductible?

It’s March 12th 2019 and millions of people are in the process of filing their 2018 tax returns. In today’s show, Eddie and Tom Knoell go through the parts of a Mortgage Are Tax Deductible based on the 2018 tax rules. They discuss whether principal, interest, taxes, or insurance are tax deductible as well as what closing costs are tax deductible.

TRANSCRIPT BELOW

Tom Knoell:                        Welcome to the Mortgage Brothers Team Podcast. I’m Tom Knoell.

Eddie Knoell:                      And I’m Eddie Knoell.

Tom Knoell:                        We’re the Mortgage Brothers Team here at Signature Home Loans located right here in Phoenix. Today’s topic, we’re going to talk about something very exciting. Actually, I’m kind of kidding. But it’s about parts and pieces of your mortgage that are tax deductible. Now I want to go into a little bit saying that we are not tax experts. We’re not claiming to be, so don’t drop your taxes off to us and ask us to prepare ’em. We’ll have no idea what to do. You will need to find the the Statue of Liberty costume person standing on the corner of one of our busy intersections, to drop your taxes high.

Eddie Knoell:                      Yeah, I love that guy.

Tom Knoell:                        Yeah, no, those guys are awesome. I don’t know which one’s better if those guys or the guys that flip the signs to tell you to eat at a sub shop.

But we just, during this tax season, that we remind you the parts and pieces of your mortgage that are tax deductible. So please, please, please consult with a professional before you actually file your taxes.

So, Ed, I don’t know if there’s any big intro that we need to do, but I thought we’d just kind of dive in.

Eddie Knoell:                      Yeah.

Tom Knoell:                        And go right into the writing of the pieces. What do you think?

Eddie Knoell:                      Yeah. No introduction. This is episode two of our podcast. Tom’s already covered what we’re going to talk about. So let’s just dive into.

One year ago we were talking about the new 2018 tax law that came out. It’s 2019 now and everyone’s looking to file their taxes. I think right off the bat, let’s just say that interest is still deductible. But it’s up to the $750,000 limit. Remember, it was a million, a year ago. Now when we file these 2018 our tax returns, it will be 750,000.

Tom Knoell:                        That’s probably the most basic question we get: is our interest tax deductible?

Eddie Knoell:                      Right.

Tom Knoell:                        That’s the one of the biggest impact pieces.

Eddie Knoell:                      That’s right.

Tom Knoell:                        Let’s do this. Let’s break the conversation up into two parts. What is your mortgage statement? Whether you’re buying or you’re refinancing, you’re going to have your mortgage statement. It will consist of a PITI, principal, interest, taxes, and insurance. If you don’t have the required down payment of 20% or more, you’ll have PMI, which is considered private mortgage insurance.

Let’s just look at the parts and pieces within the actual mortgage statement. That that makes sense, Ed.

Eddie Knoell:                      That right. That’s right. So you tell me Tom. Okay.

Tom Knoell:                        Okay.

Eddie Knoell:                      Is the principle tax deductible?

Tom Knoell:                        Tick Tock? No. So principal’s never tax deductible.

Eddie Knoell:                      Okay. Dang. All right. Okay. So everyone knows that. No principle is tax deductible. How about the interest?

Tom Knoell:                        As you were saying, yes. That’s the big Ding Ding. The previous rule was tax deduction for any interest paid on a loan amount, it used to be a million, now it’s 750,000. That’s probably one of the most important parts of this podcast.

Eddie Knoell:                      And what if I have a second home?

Tom Knoell:                        It actually applies for both second and first homes. So your primary and your cabin.

Eddie Knoell:                      Okay. So a lot of people will say, “So it doesn’t include investment properties?” What do we do with the interest on investment properties?

Tom Knoell:                        So let’s do this. The investment category is going to be, we can potentially cover it now or in a different podcast. But since you asked the investment interest can be what they call expensed off of your taxes.

Eddie Knoell:                      Right.

Tom Knoell:                        So it would be tax Deductible. Well, I guess would it technically be tax deductible?

Eddie Knoell:                      It would just be a Schedule E expense. It is an expense. Forget about the tax deduction, I think, when it comes to investment properties, it’s a line item expense.

Tom Knoell:                        Okay. So we’ve talked about principal, interest. Taxes. Would you think real estate taxes would be deductible?

Eddie Knoell:                      And the answer is yes. Up to $10,000.

Tom Knoell:                        That is going to be for all local and state taxes that you have to pay, in whatever county or district you’re in, your total lump sum amount that can be deductible is up to 10,000.

Eddie Knoell:                      That’s right.

So there’s property taxes, there’s taxes that you pay on all sorts of items. I am a little confused about the $10,000, what that includes. I think, to be fair, we always think property taxes, but like you said, the city has taxes, the county. There used to be expenses like when you’re itemizing, I paid this much taxes and sales taxes. I think it includes that. So again, this is all stuff you want to run by your CPA.

Tom Knoell:                        Yup. Agreed.

Okay. And then lastly, in terms of the insurance component.

Eddie Knoell:                      Yeah. Insurance. This has always actually been a kind of mystery to me. I’ve always forgotten what the rule was on this. So what is it?

Tom Knoell:                        So the rule is, no, unless you occupy a certain portion of your home for a business, a side business. A lot of the realtors in our audience that work in their home could potentially have a small portion of that deducted.

Eddie Knoell:                      Oh, okay. Yeah.

Tom Knoell:                        So the big answer’s no, but there is an exception.

Eddie Knoell:                      All right.

Tom Knoell:                        Now let’s now let’s just talk about the closing costs, the prepaids, and also discount points.

Eddie Knoell:                      All right. That’s right. So when anyone is getting financing and they have a closing disclosure that … we send all of our customers closing disclosures that they can actually send to their accountant. What they’ll do is, you just hand it to their accountant. They’ll actually look at all these numbers. But yeah, let’s talk about that, those expenses. What’s the first one you think is most important?

Well, let’s talk about the less appealing one out of all those, which is discount points. No one likes to charge or pay discount points. Those are basically, not to get too technical, but they’re actually interest points paid on a loan that simply reduce the actual interest rate. Did I say that right?

Yeah. I guess the IRS looks at points or any kind of discount point is basically an interest expense.

Tom Knoell:                        That’s right.

Eddie Knoell:                      It’s similar in interest expense. So they do say it’s tax deductible to you then.

Tom Knoell:                        So when you call a pay a mortgage company and you say, “What’s my interest rate?”

And they tell you, “Four and a half percent.”

And you say, “Do I have any points?” Those are the points that we’re talking about. Those points literally are considered interest points. Because they are classified as interest, do you think that they are tax deductible? Answer is yes.

Eddie Knoell:                      Yes. Right. Okay.

Tom Knoell:                        So that’s awesome. That’s good news. I don’t know if there’s anything else we need to say about that. There are a couple of little nuances on the exact pieces of how that works, but in general they are tax deductible.

Eddie Knoell:                      Okay.

Tom Knoell:                        Okay. So closing costs and prepaids. What do say about the … Well, let’s cover prepaids first.

Eddie Knoell:                      Yeah. That was something I wasn’t really sure about. When you prepay your interest prepay, well of course if it’s interest, you’re prepaying, I’m imagining that’s tax deductible. But you don’t get that statement. It isn’t something that you’re … no, wait, I’m sorry. The 1098 form would actually show that interest on the prepaid. So the prepaid interest would be tax deductible.

Tom Knoell:                        Okay, good point. And probably it’s really important, so that you don’t get lost in the, again, the nuances and the terminology is, if it says interest, regardless of it’s prepaid, it’s still tax deductible.

Eddie Knoell:                      Okay.

Tom Knoell:                        If it’s insurance, it still falls into the insurance bucket.

Eddie Knoell:                      Yeah.

Tom Knoell:                        If it is taxes, it still falls into the tax bucket. Doesn’t matter if it’s prepaid.

Eddie Knoell:                      Right.

Tom Knoell:                        So if we just rehearsed that on the prepaid homeowner’s insurance, is that tax deductible? No.

Eddie Knoell:                      No.

Tom Knoell:                        ‘Cause insurance is not.

Are the prepaid taxes tax deductible.

Eddie Knoell:                      Yes.

Tom Knoell:                        Yes. Are the prepaid interest tax deductible?

Eddie Knoell:                      Yes.

Tom Knoell:                        Yes.

Eddie Knoell:                      Okay. Well good. I think there’s a lot … okay. So what about all the other fees like home inspection, appraisal, credit report fees?

Tom Knoell:                        Yeah. I feel like we almost need a drum roll because this one, when Ed and I were talking about this, we did have to look up a couple of things. We were both scratching our heads because we hadn’t looked at this from this perspective. So drum roll. I’ll let you give the answer Ed.

Are there any closing costs, whether it’s appraisal, credit report, origination fee, title, insurance, recording fees that are tax deductible?

Eddie Knoell:                      The answer is no.

Tom Knoell:                        So sorry.

Eddie Knoell:                      Yeah.

Tom Knoell:                        I was thinking maybe one or two of those items would be.

Eddie Knoell:                      Yeah. You know, deep down in some IRS code. But as far as we have research, none of those are.

Tom Knoell:                        That’s right. That’s right.

Eddie Knoell:                      I think that we have covered, gosh, a lot. I think that was good rundown of what it is. But again, we do not give tax and legal advice so please see a CPA or your accounting professional.

Tom Knoell:                        Yup. Just to recap or not to recap, but just to close this, that is for a primary home.

Eddie Knoell:                      Oh, right.

Tom Knoell:                        It is for primary home. Any type of investment property, we could probably have a separate podcast, unless you want to cover it real quick.

Eddie Knoell:                      Well, I would just say, if it’s an investment property, it’s automatically going to be an expense, right?

Tom Knoell:                        So that’s easy.

Eddie Knoell:                      Yeah, I think it’s simple. When the accountant looks at your expenses, now that they might say, honestly there might be something that isn’t an expense they might not consider something as an expense, but I know that they’re just going to go right through the line item, right on that Schedule E. If anyone is kind of a tax return geek and they’re looking at the Schedule E’s, you’ll see that. It’s a column and it has all these items on there. So if it’s an investment property and there’s some type of expense, there’s a place for allocation for it, it’ll be tax expensed.

Tom Knoell:                        Okay.

Eddie Knoell:                      However, you would put that, the expense would be … it would lower your taxable income.

Tom Knoell:                        If you were a betting person, you’d probably bet there’s more that you could put down as an expense that you couldn’t on an investment property.

Eddie Knoell:                      Probably. That’s right.

Tom Knoell:                        Closing costs, I mean, you, you name it, there’s things that you can’t put in there as a cost of acquisition, et cetera, et cetera.

Eddie Knoell:                      Right.

Tom Knoell:                        So it is a different ball of wax.

Eddie Knoell:                      That’s right. That probably is a separate podcast, if we ever get to that one. But I’m good Tom. I think we did a good job. I hope we did and I hope that we kept it lively enough. I know that these are topics that are hard for people to digest. We appreciate you hanging through if you’re still still listening.

Tom Knoell:                        Still listening. Yep. So thanks again.

Eddie Knoell:                      Yeah, that’s right. And everyone, just remember this is a podcast. It’s also audio. If you’re watching on YouTube, you can subscribe to the YouTube channel. You’ll get notification when everything is updated. If you’re on a podcast player like iTunes or any other player like Stitcher, just subscribe and give us reviews. It would really help us out. Thank you so much.

Tom Knoell:                        Awesome. Thank you.

Eddie Knoell:                      All right, Tom, next week we’ll figure out what we’re going to cover, but we’ll let everybody know.

Tom Knoell:                        There we go.

Eddie Knoell:                      Take care everyone.

Tom Knoell:                        See Ya.

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