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- tax considerations
To take advantage of homeowner deductions, you must file federal tax Form 1040 and itemize your deductions on Schedule A. If you itemize, you can't take the standard deduction. However, if the standard deduction exceeds the amount allowed as itemized deductions, including homeowner deduction, it may be to your advantage to take the standard deduction instead. Consult with your tax advisor to determine the best way to file. Homeowner deductions can often be applied to state income taxes as well, although not all states impose a personal income tax and tax rules vary from state to state.
Expenses that may be deductible for homeowners
- Interest paid on a home loan — Interest that is paid on a first mortgage, second mortgage, home improvement loan or a home equity loan may be tax deductible.
Your lender should provide you with the annual Form 1098 along with a year-end interest statement that will be a useful reference document as you prepare your income taxes.
Premiums paid for qualified mortgage insurance on debt incurred for the acquisition, construction, or substantial improvement of the home will be treated as interest qualifying as a deduction. The deductible amount is phased out starting at adjusted gross income levels of $100,000 ($50,000 if married filing separately) and is completely eliminated if the taxpayer has $109,000 of adjusted gross income ($54,500 if married filing separately).
Deductions are limited to a maximum of two mortgaged personal residences. Rental and business properties are not considered in this limit of two. In addition, your mortgage interest cannot be deducted if your aggregate mortgage balance is more than $1 million if you are single, married and filing jointly or head of household (or $500,000 if married and filing separately).
For home equity loans, you can deduct on home equity indebtedness to a total of $100,000 if you are single, married and filing jointly or head of household (or $50,000, if married and filing separately) for your main home and second home, but only to the extent of the excess of the fair market value of the home reduced by indebtedness incurred in acquiring, constructing, or substantially improving the home.
In the early years of a conventional fixed rate mortgage, your monthly payments will primarily go toward interest. As a result, your mortgage interest deductions have the potential to create more tax savings in the early years of your mortgage.
- Real estate (or property) taxes — Property taxes are assessed annually by county or local authorities to help pay for public services and are fully deductible from income taxes. As a general rule of thumb, you can expect to pay 1% to 3% of the market value of your home in annual property taxes.
- Discount points — Points paid up front in exchange for a lower interest rate are generally deductible in the year paid if you have a purchase mortgage of less than $1,000,000 on a primary residence. If the points are paid for a refinancing of a mortgage, the points may be deductible over the life of the loan.
What cannot be deducted
- Closing costs
- Homeowners insurance expenses
- Cost of utilities
- Real estate commissions paid to agents
- Depreciation
- Home inspection, appraisal or loan application fees
Low- to moderate-income homeowners
If your state considers you to be a low- to moderate-income homeowner, you may be eligible for mortgage interest tax credits for a portion of the interest that the state pays on your behalf. You must obtain a "mortgage credit certificate" from your state or local government prior to obtaining the mortgage. Contact your local government agency for this and other eligibility information and for more information about how the credits work.
Tax information for sellers
If you're worried about the amount of taxes you may have to pay on any gains from the sale of your home (capital gains), you may be relieved from paying taxes if:
- You owned and lived in the house as your main home at least two out of the last five years ending with the date sold.
- Your gain was less than $250,000 if you are single, married and filing separately or head of household (or $500,000 if married and filing jointly).
- You have not sold another principal residence in the past two years before the sale.
- You have not depreciated your home while using it in a business or rental activity.
If you do not meet all of these conditions, then you may have to pay taxes on part of your capital gain.
Important note: This information is provided as general reference only, and does not constitute legal or tax advice. Consult your tax advisor regarding your particular situation.
