Don’t Miss Out on These 4 Real Estate Tax Deductions

08 Sep Don’t Miss Out on These 4 Real Estate Tax Deductions

It’s no secret that some of the major perks of homeownership are the tax write-offs and advantages that follow the purchase. Reaping the rewards of mortgage interest and property tax deductions is just one way to think of your home as an investment. But there are even more real estate–related tax advantages and disadvantages that can slip under a new homeowner’s radar.

Interest

If you have a mortgage on your home, the loan is probably “fully amortized.” This means a portion of your monthly payment actually repays the debt and another portion pays the interest. After a scheduled period of time your mortgage is paid off.

There are conditions. The first condition is that your primary residence or a second home must be collateral for the loan. When you refinance into a lower interest rate mortgage, the motivation tends to be the lower monthly payment. Don’t forget to calculate the potential tax deduction based on your mortgage interest, which is the largest tax perk of homeownership. Most homeowners are eligible to deduct 100% of the interest they pay on a mortgage, up to $1 million, on their primary residence. So if you reduce the interest you pay, you also reduce your mortgage interest deduction.

Home Acquisition Debt 

The IRS defines improvement costs as “home acquisition debt.” Any first or second mortgage used to buy, build, or improve your home is considered to be home acquisition debt.

Acquisition debt can be a first or second mortgage used to buy your home. If you get a second mortgage and use it all for home improvement, 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 types of loans that aren’t “grandfathered” — you can still deduct all the interest — but only if your total mortgage debt does not exceed one million dollars. For married couples filing separately, the limit is $500,000 each.

Home Equity Debt 

Home equity debt is essentially is any loan amount in excess of what was spent to purchase, build, or improve your home. If you get “cash out” when refinancing 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.”

For second mortgages, it works the same way – 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 and the total mortgage debt on the home must not exceed its value. This can create a problem for those using 125% loan-to-value second mortgages to consolidate debt. That portion of the loan amount that exceeds the value of your home is not tax deductible (unless you used it for home improvement).

Property Taxes

Most homeowners pay property taxes to a local, state or foreign government. In most cases, property taxes are deductible. They must be charged uniformly against all property in the jurisdiction and must be based on the assessed value. 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. Local property taxes are deductible only if they are for maintenance or repair, or interest charges related to those benefits.