Common Home and Property Tax Deductions You Should Know
Home ownership offers a number of tax advantages when compared to renting. If you’re a homeowner there are several tax deductions you can make relating to your property.
Our guide looks at three of the most common home and property tax deductions.
Interest payments
Do you have a mortgage on your home? If so, it is probably ‘fully amortized’. This means that part of your monthly repayment goes towards repaying the debt while another part pays the interest. This means that your mortgage will reduce as you make payments and your mortgage will be repaid at the end of the specified term.
If you itemize your deductions using Schedule A, the interest part of your mortgage payment is usually tax deductible as long as your primary residence or a second home is collateral for the loan (a ‘home’ can be a condominium, house, trailer, apartment, co-op or houseboat).
At the end of each year, your lender should send you a form 1098. This tells you how much you paid in interest and points during the year. This is your deductible interest (providing certain conditions are met).
If you obtained the loan prior to October 13, 1987, the loan is considered ‘grandfathered’. All interest paid on grandfathered loans in a given year is fully tax deductible.
Home Acquisition Debt
‘Home acquisition debt’ is an IRS term for any first or second mortgage used to buy, build, or improve your home. It can be a first or second mortgage used to buy your home. Alternatively, if you get a second mortgage and use it all for home improvements, that is also considered acquisition debt.
If you do a ‘rate and term’ refinance and don’t get any cash out – since you are just refinancing your acquisition debt – that also can be considered acquisition debt.
For any of the above loans that aren’t ‘grandfathered’ (see above) you can deduct the interest as long as your mortgage debt is less than $1 million ($500,000 each for married couples filing separately).
Home Equity Debt
Home equity debt is another IRS term and means any loan amount in excess of what was spent to purchase, build, or improve your home.
If you get cash out when you refinance your home, the amount in excess of your original loan amount is considered home equity debt (unless some of it was used for home improvement). Anything in excess of the home improvement cost is considered home equity debt.
This works the same way for second mortgages in that anything not used to improve the home is considered home equity debt.
For the interest to be fully deductible, home equity debt cannot exceed $100,000. In addition, the total mortgage debt on the home must not exceed its value.
This can be a problem if you have used a 125% loan-to-value second mortgages to consolidate debt. The portion of the loan amount that exceeds the value of your home is not tax deductible (unless you used it for home improvement).
Can I deduct property taxes?
Bert – thanks for your question.
In most cases, property taxes paid to local, state of foreign governments are deductible. They must be charged uniformly against all property in the jurisdiction and must be based on the assessed value.
However, while many states and counties also impose property taxes for local improvements to property (such as assessments for streets, sidewalks, and sewer lines) these taxes cannot be deducted.