Home ownership brings with it not only many trips to home improvement stores, but also a slew of tax breaks. It's up to you to take full advantage of the write-offs available to you. Here's what you can and can't deduct.
For most people, the biggest home-related deduction is for mortgage interest. How do you figure out how much you've paid in mortgage interest during the year?
You should receive a statement from your lender by the end of January listing the mortgage interest you paid during the previous year. This statement will be labeled Form 1098. It may be attached to, or part of, your monthly mortgage statement, so be sure that you study your your January statement carefully to identify any portion that may be labeled as Form 1098. The amount shown as interest paid on Form 1098 is the amount you deduct on your tax return.
Where do I take this deduction?
Fill out Schedule A, Itemized Deductions, to take a deduction for mortgage interest.
- If you received Form 1098 reporting the amount of mortgage interest you paid for the year, record your interest deduction on Line 10.
- If you didn't receive Form 1098, use Line 11 instead.
If your home loan is with a private party (for example, with the person from whom you bought the home), you may not receive a statement of interest paid even though your mortgage holder should complete one for you. You can still deduct the interest as long as your loan is secured by your home.
Report your lender's name, address and Social Security number on the lines next to Line 11. (You should have been given this information during the closing of your home purchase). Remember that you have to be liable for repayment of the loan to deduct mortgage interest. If you pay your son's or daughter's mortgage to help them out, for example, you cannot deduct the interest unless you co-signed the loan.
What about late charges?
You can deduct a late payment charge as home mortgage interest as long as the charge was not for a specific service you received in connection with your mortgage loan.
What about a prepayment penalty?
If you pay off your home mortgage early and you're required to pay a prepayment penalty, you may deduct that penalty as home mortgage interest as long as the charge was not for a specific service you received in connection with your mortgage loan.
For more information on mortgage interest, see IRS Publication 936: Home Mortgage Interest Deduction.
When you buy a house, you often have to pay points to the lender to get your mortgage. These points can usually be deducted as prepaid interest. Other terms for points are:
- Loan origination fees
- Maximum loan charges
- Loan discount
- Discount points
You may deduct any points you pay, or points your seller paid on your behalf, in the year in which you pay the points, if you meet all of these requirements:
- Your loan is secured by your primary residence (the one you live in most of the time).
- Paying points is usual for your area.
- The amount of the points isn't out of line for your area.
- You use the cash method of accounting for expenses (you most likely do). Using the cash method means you report income in the year you receive it and deduct expenses in the year you pay them.
- The loan was used to buy, improve or build your home.
- The points are computed as a percentage of the loan principal.
- The points are clearly delineated on your settlement statement.
- You put cash into your home purchase in an amount at least equal to the points you (and the seller) were charged. If you and the seller were charged a total of $3,000 in points, for example, you pass this test as long as your down payment was at least $3,000.
Some points do not meet these criteria. They may still be deductible, but you have to deduct them over the life of the loan.
- Points paid for refinancing generally can only be deducted over the life of the new mortgage. If you pay $2,000 in points to refinance a 30-year mortgage, for example, you'd deduct that amount over 30 years—about $67 a year. It's up to you to remember to take this deduction each year.
- Points you pay on loans secured by your second home also can be deducted only over the life of the loan.
"Points" charged for specific services, such as preparation costs for a mortgage note, appraisal fees or notary fees, are not interest and cannot be deducted.
For more details on deducting points, see IRS Topic 504: Home Mortgage Points.
Real estate taxes
You can deduct annual taxes based on the assessed value of your property.
Where do I find how much I've paid in property taxes?
- Your mortgage interest statement may list the amount of real estate taxes you paid if you use an escrow or impound account with your lender to cover real estate taxes and homeowner insurance.
- If your real estate taxes aren't included in escrow payments made with your mortgage payments, look through your cancelled checks to figure out how much you paid for property taxes during the year.
- Be sure to pick up any real estate taxes included on your settlement or closing statement as well.
Caution: Don't deduct your payments into your escrow account as real estate taxes. Your deposits are simply money put aside to cover tax payments. You should deduct only the actual property tax payments made from the account by your lender during the year.
Where do I take the deduction?
If you itemize, deduct your real estate taxes on Line 6 of Schedule A.
What can't I deduct as property taxes?
You can't deduct charges for services to a specific property or for specific people even if the payments are made to the taxing authority in your area. Examples include:
- A unit fee for the delivery of a service (such as water delivery).
- A charge for a residential service, such as trash collection
- A flat charge paid for a single service provided to you. specifically by your local government.
- Amounts you pay for local benefits that tend to increase the value of your property, such as the construction of streets, sidewalks or water and sewer systems. But you can deduct whatever you pay for assessments for repairs or maintenance.
Certain mortgage insurance payments
Through 2014, if you pay private mortgage insurance (PMI) premiums on a qualifying policy issued after 2006, you can generally deduct the premiums as additional mortgage interest. Claim the deduction on Line 13 of Schedule A.
The full deduction can only be taken if your Adjusted Gross Income (AGI) is $100,000 or less ($50,000 if you use married filing separate status). The deduction is phased out for incomes greater than this. The amount of PMI that you pay for the year can be found on Form 1098, which you receive from your mortgage lender.
Mortgage insurance, which protects the lender if you default, should not be confused with more common homeowner’s or fire insurance.
Save receipts and records for all improvements you make to your home, such as landscaping, storm windows and fencing. You can't deduct these expenses now, but when you sell your home the cost of the improvements is added to the purchase price of your home to determine the cost basis in your home. This will reduce any potential taxable gain that you may have from the sale of your home.
Home expenses you can't deduct
A number of significant costs of home ownership are not deductible, including:
- Homeowner's insurance premiums
- Fire insurance premiums
- FHA mortgage-insurance premiums
- Principal payments made on your mortgage
- Title or mortgage insurance
- Utilities, such as gas, electricity, water or trash collection
- Most settlement costs on your closing or settlement statement, including transfer taxes and Mortgage Recording Taxes
- Homeowner's association dues and fees
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