Tax: Deductions for Real Estate

Dated: 03/11/2020

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If you plan to itemize, consider the following tax deductions for homeowners: 

1. Mortgage interest - Deducting mortgage interest is something most homeowners look forward to during tax season. This includes any interest you pay on a loan secured by your primary or secondary home (not including investment properties). Here’s how to qualify:your mortgage or home equity line of credit (HELOC) is dated before December 15, 2017, you can deduct interest on up to $1 million of the mortgage (or $500,000 if you are married but filing separately). mortgages and HELOCs dated after December 15, 2017, you can deduct interest on up to $750,000 of the mortgage (or $375,000 if you are married but filing separately).

Interest on home equity loans or lines of credit is deductible only if it was used to buy, build, or substantially improve the home that secures the loan.

2. Property taxes - As a homeowner, you may be able to claim property taxes on your tax return this year. You can deduct up to $10,000 of state and local income taxes, including property taxes paid on your primary home, or any other real estate you own. If you’re married but filing separately, you can deduct up to $5,000.

3. Real estate property taxes paid at settlement or closing - When you close on your home purchase, the property’s real estate taxes are divided, so buyers and sellers each pay taxes for the part of the property tax year they owned the home. So, if you bought a home last year, these taxes would be deductible for the 2019 tax year.

4. Home improvement tax deductions - Generally, home improvement projects aren’t considered tax-deductible. So don’t expect to receive a refund for your new, beautiful patio or decked-out man cave. However, here are two types of home improvements that may qualify for a tax deduction (speak to your tax expert):

If you made medically-necessary improvements to your home, such as installing a wheelchair ramp or making modifications to a bathroom shower due to an illness or medical reason, you can deduct these improvements as a medical expense.

If you made improvements to your home’s energy efficiency, you become eligible for a 30% tax credit. For example, if you spend $10,000 to purchase and install solar panels, you can claim a $3,000 credit in that year.

5. Moving expenses for active-duty military - Active-duty military personnel can deduct certain un-reimbursed moving expenses incurred if the move was a permanent change of station (PCS), according to the IRS. 

6. Mortgage “points” - Points are charges paid by a borrower to obtain a home mortgage. Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points. You can claim points as a tax deduction. 

When deducting points you must deduct the points over the term of the mortgage. You can, however, deduct the full amount of points in the year you paid them if you meet all the following guidelines. Please consult a tax expert.

7. Home improvement loan - If you get a home improvement loan for your primary residence and have to pay points, you can fully deduct the points if you meet the guidelines discussed in #6.

8. Refinanced loan - If you refinance your mortgage loan and use some of the money to improve your principal residence, plus you meet the guidelines listed in #6 above, you can deduct the portion of the points related to the improvement in the year you paid for the improvements. You can deduct the rest of the points over the life of the loan.

9. Prepaid interest - Did you pay interest in advance during the purchase process? If you paid a higher amount than necessary for that year, you can’t claim it all upfront. You need to spread this interest over the tax years to which it applies. Generally, you can only deduct the interest from that tax year.

10. Mortgage interest paid at settlement or closing - Your settlement or closing statement may include a line item for home mortgage interest. You can deduct the interest that you pay at settlement. This amount should be included in the mortgage interest statement provided by your lender.

11. Late payment charge on a mortgage payment - While you can’t deduct a late payment charge if you failed to make your mortgage payment on time, you may be able to deduct a late payment charge as “home mortgage interest” if the fee is not for a specific service in connection with your mortgage loan. One example of such a lender-provided service would be the completion of a home assessment or another similar service.

12. Mortgage prepayment penalty - Some mortgage agreements include a penalty for paying off the mortgage ahead of schedule. Once again if the penalty isn’t for a specific service or cost incurred in connection with your mortgage loan, you can deduct that penalty as home mortgage interest.

13. Mortgage interest credit - The mortgage interest credit is intended to help lower-income individuals afford homeownership. If you qualify, you can claim the credit each year for a portion of your mortgage interest.

14. Private mortgage insurance (PMI) - If your mortgage includes PMI – because your down payment on the home purchase was less than 20% – you might be able to deduct the PMI. Depending on your loan type, there are other fees similar to PMI that can be a deduction. A loan through the Veterans Administration has a funding fee. A loan through the Rural Housing Administration has a guarantee fee. These can be deducted in the year they were issued.

There are, however, limitations to PMI tax deductions. You must allocate your PMI deductions over the term of the mortgage or 84 months, whichever time is shortest. These limitations do not apply to qualified mortgage insurance provided by the Department of Veterans Affairs or Rural Housing Service.

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Courtney Silverman

• I KNOW RESIDENTIAL REAL ESTATE • Full-time top producing Real Estate Professional 18 yrs+ • Marketing, Negotiating skills, Competence & Ethical standards • Get your home sold - ASAP for top ....

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