Tax Deductions For Homeowners

Dated: 02/03/2016

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There are many perks to owning your own home. One of those is that ownership can really pay off at tax time. Don’t miss out on these deductions as a homeowner.

Mortgage Interest Deduction

One of the most common deductions that itemizing homeowners are allowed to take is the mortgage interest deduction. You claim this on Schedule A. To be eligible for this deduction, your mortgage must be secured by your home; whether that is a house, trailer, or boat. As long as you sleep in it, can cook in it, and has a toilet; it qualifies.

If you take on another mortgage (including a second mortgage, home equity loan, or home equity line of credit) to improve your home or to buy or build a second home in most cases you can deduct the interest on that as well, up to a $1 million limit.

If you use loans secured by your home for other things — like helping with medical bills or sending your kids to college — you can still deduct the interest on loans up $100,000 ($50,000 for married filing separately) because your home secures the loan.

Prepaid Interest Deduction

Prepaid interest (or points) you paid when you took out your mortgage is generally 100% deductible in the year you paid it along with any other mortgage interest.

The same holds true if you refinance your mortgage and use that money for home improvements, any points you pay are also deductible in the same year as received.

But if you refinance to get a better rate or shorten the length of your mortgage, or to use the money for something other than home improvements, such as college tuition, you’ll need to deduct the points over the life of your mortgage. For instance, if you refinance into a 10-year mortgage and pay $4,000 in points. You can deduct $400 per year for 10 years.

Home mortgage interest and points are reported on Schedule A, form 1040.

Your lender will send you aform 1098 that lists the points you paid. If not, you should be able to find the amount listed on the HUD-1 settlement sheet you got when you closed on the purchase of your home or during your refinance closing.
Property Tax Deduction

Another allowed deduction is your real estate property tax. If you have a mortgage with an escrow account, the amount of real estate property taxes you paid shows up on your annual escrow statement provided by your mortgage lender.

If you are a new homeowner, check your closing documents to determine if you paid any property taxes at closing. Those taxes are deductible as well.

PMI and FHA Mortgage Insurance Premiums

In addition, PMI is allowed to be deducted. The change only applies to loans taken out in 2007 or later.

What’s PMI? If you have a mortgage but didn’t put down a fairly good-sized down payment (typically 20%), the lender requires the mortgage be insured. The premium on that insurance can be deducted, so long as your income is less than $100,000 (or $50,000 for married filing separately).

If your adjusted gross income is more than $100,000, your deduction is reduced by 10% for each $1,000 ($500 in the case of a married individual filing a separate return) that your adjusted gross income exceeds $100,000.

Besides private mortgage insurance, there’s government insurance from FHA, VA, and the Rural Housing Service. Some of those premiums are paid at closing, and deducting them is complicated. A tax adviser or tax software program can help you calculate this deduction. Also, the rules vary between the agencies.

Vacation Home Tax Deductions

The rules on tax deductions for vacation homes are complicated. Keeping good records is imperative if you have a home you designate for vacations.

If you’re the only one using your vacation home (you don’t rent it out for more than 14 days a year), you deduct mortgage interest and real estate taxes on Schedule A.

Rent your vacation home out for more than 14 days and use it yourself fewer than 15 days (or 10% of total rental days, whichever is greater), and it’s treated like a rental property. Your expenses are deducted onSchedule E, form 1040.

Rent your home for part of the year and use it yourself for more than the greater of 14 days or 10% of the days you rent it and you have to keep track of income, expenses, and allocate them based on how often you used and how often you rented the house.

Homebuyer Tax Credit

This is not a deduction. However, the federal first-time homebuyer credits that were taken by people who purchased their homes after April 8, 2008, and before January 1, 2009 must repay 1/15th of the credit each year over 15 years, with no interest. The IRS has a tool to assist you in calculating what you owe each year until it is paid off. If you sell the home prior to that time you may be liable for adding the remaining credit amount to your income tax return for that year.

Generally, you don’t have to pay back the credit if you bought your home in 2009, 2010, or early 2011. The exception: You are required to repay the full credit amount if you sold your house or stopped using it as your primary residence within 36 months of the purchase date. Then you must repay it with your tax return for the year the home stopped being your principal residence.

The repayment rules are less severe for uniformed service members, Foreign Service workers, and intelligence community workers who got sent on extended duty at least 50 miles from their principal residence.

Energy-Efficiency Upgrades

TheNonbusiness Energy Tax Creditlets you claim a credit for installing energy-efficient home systems. Tax credits are especially valuable because they let you offset what you owe the IRS dollar for dollar, in this case, for up to 10% of the amount you spent on certain upgrades.

The credit carries a lifetime cap of $500 (less for some products), so if you’ve used it in years past, you’ll have to subtract prior tax credits from that $500 limit. Lucky for you, there’s no cap on how much you’ll save on utility bills thanks to your energy-efficiency upgrades.

I hope this has been helpful in giving your some insight into some of the monetary benefits of being a homeowner at tax time. These are significant ways to help offset the annual costs of owning and maintaining a home.

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Sam Lepore

Sam Lepore is a Realtor with Keller Williams in Moorestown, NJ. Call him today at 856.297.6827 ....

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