Tax Tips and Tidbits
February 1, 2017
By Steven R. Anderson E.A.
Well, all the tax reporting information documents should be in the mail, or received by now, and the filing season is in full swing! This week’s Tax Tips and Tidbits deals with deductions for homeowners.
The IRS defines a home as any house, condominium, cooperative, mobile home, boat, or similar property that has sleeping space, toilet facilities, and cooking facilities. Some homeowners qualify for these deductions.
Real Estate Taxes:
You can deduct real estate taxes assessed on all the real estate you own. This includes school taxes. You are not limited to the tax on just one or two homes.
- Only the amount actually paid is deductible. Don’t confuse this amount with deposits made to your mortgage escrow account.
- Charges for trash collection, sewer, etc., are sometimes added to real estate tax bills. These amounts are not deductible as real estate taxes.
- Special assessments are sometimes added to real estate tax bills. Assessments are not necessarily deductible as real estate taxes. Here are a few common ones:
Improvement assessments tend to increase property value. These are not deductible. Add this amount to your basis in the home. (Example: Assessment to build new sidewalk.)
Maintenance Assessments are used to maintain existing public facilities already in use. These you can deduct as real estate taxes. (Example: Assessment to repair existing sidewalk.)
If you borrow money to buy, build, or substantially improve your main or second home, the mortgage interest may be claimed as an itemized deduction on Schedule A.
Your lender will generally give you Form 1098, Mortgage Interest Statement, to tell you how much interest you have paid.
- An explanation must be attached to your tax return if the amount shown on Form 1098 is different from the deducted amount or if more than one person paid deductible mortgage interest (other than a spouse filing jointly).
- If you did not receive Form 1098, you must provide the name, identifying number, and address of the interest recipient.
A home mortgage is any loan secured by your main or second home, including first and second mortgages, home equity loans, and refinanced loans. The loan must be legally recorded, with the home as collateral for the debt. You must be legally liable to make the payments. For example, if you borrow money from your parents to make a down payment on your home, you cannot deduct the interest you pay them unless the loan is legally recorded with the home as collateral.
You may generally deduct the mortgage interest on your main home and a second home, up to the limits described below.
- A loan secured by a third home is a personal loan and the interest is not deductible. Interest on a third home used exclusively for business might be deductible as a business expense.
- Your mortgage interest deduction is limited, based on the type of debt you have:
|Debt Type and Limit||Definition|
|•Acquisition debt: $1,000,000 combined debt on main and second home ($500,000 MFS).||Used to buy, build, or substantially improve a main or second home.|
|•Home equity debt: $100,000 combined debt on main and second home ($50,000 MFS).||Debt secured by a main or second home that is not acquisition debt.|
Debt that is refinanced generally retains its character as acquisition or home equity debt, up to the old loan balance.
- Debt used to substantially improve your home is acquisition debt, even if it is refinanced home equity debt.
- Refinanced acquisition debt that exceeds your old debt may qualify as home equity debt.
Terms such as points, loan discount, loan origination fees, etc., refer to certain charges you might pay in order to obtain a mortgage. If you pay points to borrow money, the points are deductible as prepaid interest.
- Refinance points are deductible rateably over the life of your loan. Points you pay at the time of your home purchase are deductible in full.
- Points you pay to the lender in exchange for a lower interest rate are generally shown on your closing statement. Each point charged to obtain a loan is 1% of the loan amount. For example, 2.5 points charged on a $100,000 loan equals $2,500 ($100,000 × 2.5%).
- Fees your lender charges for specific loan services are not deductible. Examples include appraisal, notary, and document fees.
Mortgage Insurance Premiums:
Premiums paid for acquisition indebtedness for insurance contracts issued after December 31, 2006, on a first or second home are treated as deductible mortgage interest. The deduction begins to phase out when AGI exceeds $100,000 ($50,000 MFS). Qualified mortgage insurance providers include the Department of Veterans Affairs, the Federal Housing Administration, or the Rural Housing Service, and private mortgage insurance.
The deduction expires for premiums paid or accrued after December 31, 2016.
The cost of improving, or remodeling your home is not deductible. These costs increase your basis in the home and will reduce the gain on a sale in the future. However, any sales tax you pay on the material used to improve or remodel your home may be deductible. Next week we will talk about the deductions for taxes paid.
Steven Anderson is an Enrolled Agent, licensed to practice before the IRS. He is the owner of the Beacon and Pawling franchises of H&R Block where he holds a Master Tax Advisor certification and has 27+ years of experience. Steve is also a graduate of the National Tax Practice Institute and a member of the American Society of Tax Problem Solvers, with specialization in collection cases.