Deductions
What home-buying costs are deductible?
Are points deductible?
Are property taxes deductible?
Are seller-paid points deductible?
Are taxes on second homes deductible?
Are the costs of a natural disaster deductible?
Are there any special tax breaks for historic rehab?
Are there tax credits for first-time home buyers?
Can I deduct the loss I suffered when I sold my home?
Can you deduct the cost of home improvements?
Explain the home mortgage deduction
Mortgage Interest Deduction
Home Acquisition Costs
Home Improvements
Relocation & Moving
What home-buying costs are deductible?
Any points you or the seller pay to purchase your home loan are deductible for that year. Property taxes and interest are deductible every year.
But while other home-buying costs (closing costs in particular) are not immediately tax-deductible, they can be figured into the adjusted cost basis of your home when you go to sell (any significant home improvements also can be calculated into your basis). These fees would include title insurance, loan-application fee, credit report, appraisal fee, service fee, settlement or closing fees, bank attorney's fee, attorney's fee, document preparation fee and recording fees. Points paid when you refinance an existing mortgage must be deducted ratably over the life of the new loan.
Are points deductible?
If you are a buyer, and you or the seller pays points, they are deductible for the year in which they are paid only. You also can deduct any points you pay when you refinance your home, but you must do so ratably over the life of the loan. Consult your tax or financial advisor.
Are property taxes deductible?
Property taxes on all real estate, including those levied by state and local governments and school districts, are fully deductible against current income taxes.
Are seller-paid points deductible?
As of Jan. 1, 1991, homeowners have been able to deduct points paid by the seller. This deduction previously was reserved only for points actually paid by the buyer.
Are taxes on second homes deductible?
Mortgage interest and property taxes are deductible on a second home if you itemize. Check with your accountant or tax adviser for specifics.
Are the costs of a natural disaster deductible?
Damage, destruction or loss of property from fires, floods, earthquakes and other disasters are deductible from both state and federal income taxes. In such a case, the IRS only allows a deduction less than or equal to the fair-market value of the property before the disaster.
Losses on the sale of your own home are not deductible, through they are deductible for rental properties.
Are there any special tax breaks for historic rehab?
Qualified rehabilitated buildings and certified historic structures currently enjoy a 20 percent investment tax credit for qualified rehabilitation expenses. A historic structure is one listed in the National Register of Historic Places or so designated by an appropriate state or local historic district also certified by the government.
The tax code does not allow deductions for the demolition or significant alternation of a historic structure.
Resources:
National Trust for Historic Preservation
Washington, D.C.
(202) 588-6000.
Are there tax credits for first-time home buyers?
Many city and county governments offer Mortgage Credit Certificate programs, which allow first-time home buyers to take advantage of a special federal income tax write-off, which makes qualifying for a mortgage loan easier.
Requirements vary from program to program. People wanting to apply should contact their local housing or community development office.
Here is a list of four general requirements to keep in mind:
- Some credit may be claimed only on your owner-occupied principal residence.
- There are maximum income limits, which vary by locality and family size.
- You must be a first-time home buyer, which means you must not have had any kind of ownership interest in a principal residence during the past three years. This restriction may be waived, however, if you are buying property within certain target areas.
- Allocations must be available. A local MCC program may have to decline new applications when it runs out of funds.
Can I deduct the loss I suffered when I sold my home?
The Internal Revenue Service currently does not allow deductions for losses on the sale of your own home. In fact there's no way to use a loss on the sale of your principal residence to your advantage on your income tax return.
Can you deduct the cost of home improvements?
What you spend on permanent home improvements, such as new windows, can be added into your home's cost basis, or amount of money invested in a home, which reduces capital gains when it comes time to sell. Capital gains are determined by the difference in price from the time a home is purchased and the time it is sold, minus the cost of any permanent improvements.
However, the 1997 tax changes virtually eliminates the capital gains tax for most homeowners (the exemption is $250,000 for single homeowners and $500,000 for married homeowners.)
Still, it is worthwhile to save all receipts for permanent home improvements just in case. They also can be useful documentation when it comes to marketing your home when you sell.
Explain the home mortgage deduction
The mortgage interest deduction entitles you to completely deduct the interest on your home loan for the year in which you paid it. Mortgage interest is not a dollar-for-dollar tax cut; it reduces taxable income. You must itemize deductions in order to do this, which means your total deductions must exceed the IRS's standard deduction.
Another point to remember is that the amount of interest on your loan goes down each year you pay on your mortgage (all standard home-loan formulas pay off interest first before significantly paying into principal). That's why paying extra on your principal every year can help you pay off your loan early.
Mortgage Interest Deduction
The most important tax benefit homeowners have is the mortgage interest deduction. Homeowners may deduct interest paid on mortgage loans (totaling up to $1 million), used to buy, build or improve a primary residence and/or a second home.
The mortgage interest deduction entitles you to deduct the interest on your home loan for the year in which you paid it. Mortgage interest is not a dollar-for-dollar tax cut; it reduces taxable income. The amount of interest on your home mortgage will decrease each year. This is why making principle reductions every year will pay off your loan early.
When purchasing a new home, the borrower is usually required to pay interest from the closing date until the first of the next month. Verify whether or not that charge is included in the year-end statement.
You must itemize to use this deduction, and your total deductions must exceed the IRS's standard deduction.
Home Acquisition Costs
Any points paid by you or the seller to purchase your home is deductible for that year. Closing costs are not immediately tax deductible but they can be figured into the adjusted cost basis when you sell your home. These fees would include title insurance, loan application fee, credit report, appraisal fee, service fee, settlement or closing fees, document preparation and recording fees.
Home Improvements
Any money that you spend on permanent home improvements, (i.e., new windows or flooring), can be added into your home's cost basis, or amount of money invested in a home, which reduces capital gains when the home is sold.
Relocation & Moving
Some moving expenses are deductible for people who have changed jobs and relocated as a result. The IRS requires that the new employment be located at least 50 miles away from their current residence.
