Owning real estate comes with many benefits, but also a fair amount of costs. The tax code includes several breaks designed to offset some of those costs, but generally, the only person who can claim them is the legal or equitable owner, often referred to as the owner of record. Usually, that's the person listed in public records as the owner of the property.
Deducting mortgage interest
One of the biggest tax breaks for property owners is the tax deduction for mortgage interest. In general, you can deduct interest that you pay on a home loan if you (and the loan) meet these three criteria:
- The mortgage is for your principal residence and/or a second home.
- The home acts as collateral for the mortgage.
- You have an ownership interest in the property.
Each January, you'll usually receive a copy of Form 1098 from your mortgage lender telling you how much interest was paid on your loan the preceding year, which you can use in filling out your taxes.
One thing to note: Although a home's owner of record is almost always the borrower on the home's mortgage, the IRS doesn't actually require you to be legally liable for the loan for you to deduct the interest. In other words, you can deduct mortgage interest even if your name's not on the mortgage, as long as you are the owner of record and you made the interest payments.
Deducting mortgage 'points'
In real estate language, a "mortgage point" is a fee, paid at closing, that's equal to 1% of the loan amount. Two points on a $200,000 mortgage, for example, would equal $4,000. Buyers might pay points to get a better interest rate or just as a condition of obtaining the loan.
Points are often tax deductible—and when they are, the buyer of the home usually gets to claim the deduction regardless who actually paid for the points. It's not uncommon for home sellers to agree to pay points for a buyer if doing so will help close the deal.
Real estate tax deduction
Owners of real estate can usually take a tax deduction for the property taxes they pay. This doesn't just apply to your home. Generally, any real estate tax paid to a local, state or foreign government is deductible, so long as the tax is imposed at a specific rate based on property value. (Special tax levies for improvements such as paving the street in front of your property usually do not qualify for a deduction.)
The IRS says that for any tax to be deductible on your income tax return, "the tax must be imposed on you" And you must pay it. Real estate taxes are usually imposed only on owners of record. Indeed, one of the key functions of the official property records kept in county courthouses across the country is determining who is responsible for the tax on each property.
If someone else pays property taxes on your behalf, he or she might not be able to claim the deduction, since the tax was not imposed on that person. But if you paid it then generally you could claim it.
Buyers, sellers and property taxes
Property taxes are so closely tied to ownership status that when you buy or sell real estate, the tax deduction depends not on who paid what, but on who owned the house and when.
- As with points, sometimes home sellers will agree to pay a portion of property taxes on behalf of the buyer, or vice versa. That kind of arrangement is strictly between them.
- The IRS considers the seller to have paid the taxes up until the day before the sale.
- The buyer is considered to have paid the taxes for the sale date and afterward.
For example, say you bought a home of August 23, and the property taxes on the home come to $5,000 a year.
- The seller was the owner of record from January 1 to August 22, or 234 days.
- That's 64.11% of the year.
- The buyer is the owner of record from August 23 to December 31—131 days, or 35.89% of the year.
- The seller can deduct $3,205.48 (64.11% of $5,000), and the buyer can deduct $1,794.52 (35.89% of $5,000)
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