Homeowners with mortgages can deduct interest on their primary and second mortgages, as well as take advantage of a home office deduction. Points paid when buying a home or refinancing are also tax deductible, while costs associated with selling a home can be deducted from taxable income. Eligibility requirements vary and should be checked annually.
Homeowners can take advantage of a special real estate tax deduction if they have an outstanding mortgage. This includes interest on a primary mortgage and a second mortgage. There are different real estate tax deductions when buying or selling a home.
Mortgage interest is tax deductible for the tax year in which it is paid. To qualify for this real estate tax deduction, homeowners must itemize their tax return deductions using IRS Form 1040, Schedule A, when filing a tax return. There is an additional tax return deduction that can be listed on Schedule A, the home office tax deduction.
If part of a home is used only as a business office, the owner may qualify for the home office real estate tax deduction. The owner must calculate the square footage to figure out how much of the mortgage covers this part of the house. When the home office deduction is used, the office area cannot be included in the mortgage deduction.
Basically, this means that the owner cannot take two different tax deductions for the same part of the house. Restrictions and limitations apply when using the home office deduction. If the homeowner does not qualify for the home office deduction, then the mortgage deduction can still be used for this area of the home.
People who have a mortgage on a second home can also use the mortgage deduction. If the home is a rental property, the owner must use the home for at least part of the year to qualify for the deduction. If the home is not rented, the owner qualifies for the deduction whether or not the owner lives in the home during the year.
Other tax deductions are available when people buy or sell a home. Buyers sometimes pay points when buying a home to reduce the interest rate on the mortgage. Points are prepaid interest and are generally equal to 1% of the mortgage amount. These points are tax deductible in the year they are paid.
If a homeowner is refinancing an existing mortgage, different rules apply. Points paid are still tax deductible, but the deduction is spread over the life of the loan. For example, a home is refinanced and the owner pays three points, or $4,000 on a 20-year loan. The owner divides the $4,000 USD over 20 years to calculate the annual property tax deduction. This homeowner can deduct the mortgage interest plus $200 on their tax return each year for the next 20 years.
When a home is sold, the seller can deduct costs associated with the sale from the amount of taxable income from the sale. These costs may include advertising, closing costs charged by the lender, and real estate agent commissions. The cost of major home improvements completed to make the home ready for sale can also be included in this property tax deduction.
Actual estate tax deduction amounts will vary based on IRS eligibility requirements. IRS regulations are generally updated each year. Owners can consult the official IRS website, or a tax professional, when calculating real estate tax deductions before filing a tax return.
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