Simple Form of Tax Write Offs for Homeowners
As a homeowner you pay more than just a mortgage; you pay to maintain and improve your home as well. Beside purchases and improvements, interest is one of the largest expenses you pay for your home. Some of these expenses are deductible, reducing the monetary burden on you. However, you should know what you can claim as a deduction, and what expenditures increase your basis, to maximize your tax deductions.
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Mortgage Interest
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The IRS does not allow you to deduct interest on all mortgages, and in fact, the home must be a qualified residence secured by mortgage debt to deduct the interest. The IRS defines a qualified residence as your main home or a second residence. You can only claim one home as your main home at any given time. You may choose any other home you own as your second home as long as there was no rental activity at any time during the tax year. To claim interest deductions on second homes with rental activity, you must have stayed in the home at least 14 days, or the number of days equivalent to 10 percent of the total days the property was rented during the tax year.
Points
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Mortgage points are fees paid to the lender at loan origination. You may know points as origination fees, discount points or loan discounts. Your mortgage holder reports points you paid on form 1098 and recorded on line 11 of your form 1040 schedule A. Although you pay these points at loan origination, you deduct them over a lengthy period. Deduct your points ratably over the life of your loan, unless you qualify for an exception. For assistance determining if you qualify for an exception to ratable deduction of points, contact your local enrolled agent, a tax specialist licensed by the Department of Taxation in tax matters.
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Real Estate Taxes
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Real estate taxes are taxes generally imposed by your state, county or city. You must also consider foreign real estate tax. To qualify as a deductible expense, the government body has to calculate real estate taxes with a uniform formulated assessed value applied to all property of the same class or zone, within a designated physical area. Special tax assessments are not deductible real estate taxes. Only taxes paid during the tax year are deductible.
Considerations
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Although you pay many expenses associated with home ownership, only IRS approved expenses are deductible. Items including homeowners insurance, home owners' association dues, utility bills, depreciation, maintenance and security monitoring are not deductible. You may be able to deduct some of these expenses if you operate a business from your home office; however, you should consult the IRS rules regarding business use of your home before deducting these expenses.
Expert Insight
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The IRS limits deductions you are eligible to claim as a homeowner. Mortgage interest is only deductible on purchase or improvement money, or home equity loans not for purchase or improvements up to $100,000. Interest on mortgage principle amounts exceeding $1,000,000, or $500,000 for married filing separately taxpayers are not deductible. Itemized deductions are subject to phase out limitations, which are IRS imposed thresholds for your adjusted gross income, or AGI. Your AGI that exceeds the IRS threshold reduces your allowable itemized deductions.
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References
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