Blog

Welcome to the BeSmartee blog. Enjoy a wide selection of articles related to mortgages, the industry, and real estate.

Tax Deductions for Homeowners

By Veronica Nguyen · Dec 8, 2014 · Real Estate

Tax Deductions for Homeowners

Image courtesy of Flickr, Brian J. Matis

List of the most common mortgage and real estate tax deductions you need to know about.

While being a homeowner is a rewarding experience, it also comes with big financial responsibility. From paying your mortgage, property taxes and unforeseen repairs, sometimes it seems like all you do is spend money.

Fortunately, the IRS has created tax deductions made especially for homeowners to reduce your personal income taxes. Below is a list of those tax deductions you may be able to benefit from.

1. Property Taxes

Most state and local governments charge an annual property tax. You can deduct all the property taxes actually paid to help you reduce your tax burden. In the case that you pay property taxes through an escrow account, be aware that you can only deduct the amount actually paid to the taxing authority, which may be different than what you paid into the escrow account.

Note that your tax bill may also include additional fixed charges, special assessments and bond indebtedness. These are not deductible.

BeSmartee TipTip: You can prepay the next installment of your property tax bill before the end of the year to increase your deductions for the current year. However, this prepayment strategy may not be beneficial if you anticipate being subject to the alternative minimum tax. Speak with your tax professional for details.

2. Mortgage Interest Credit

To take advantage of the mortgage interest credit you must have qualified for the Mortgage Credit Certificate (MCC) - a tax credit program. This program is made for low to moderate income families to help them afford a home. It allows homeowners to convert 20% of their annual mortgage interest into a tax credit.

If you believe you may qualify for the tax credit program you can contact your local lender to see if they are approved to issue the MCC.

BeSmartee TipTip: The MMC tax credit program is administered by both your local and federal government. To find out more about the process and how you can qualify, contact your local Housing Finance Agency (HFA). Click here for a list by state.

3. Mortgage Interest Deduction

The interest you pay on your mortgage loan is tax deductible if your loan is secured by your main home or second home, and if you itemize your tax deductions. For many, the mortgage interest deduction may significantly decrease your taxable income.

There are additional rules you should be aware of. Click here to learn more about the mortgage interest tax deduction.

BeSmartee TipTip: Investment properties do not apply. Therefore, your second home cannot be a rental property and must be occupied by the owner at least part-time. Talk to your tax professional to find out if you qualify to benefit from the mortgage interest deduction.

4. Discount Points

Home mortgage points, also known in the industry as mortgage discount points, are prepaid interest according to the IRS. Therefore, you are able to claim the entire amount of points paid as a deduction in the year you paid them if the mortgage loan is secured by your primary home, among other minimum rules listed here.

Points paid on a mortgage secured by a second home must be amortized over the life of your loan. Points paid as part of a refinance must also be amortized over the life if your loan, unless the refinance proceeds were used to improve your home.

BeSmartee TipTip: Deducting points paid on your mortgage loan can be a little tricky to understand due to the timing and amortization rules due to type of loan, use of loan funds and property type. Be sure to check with your tax professional to see when and how much you can claim.

5. Home Improvement

You can deduct the money you spend home improvements, but not money spent on home repairs.

As explained by the IRS, home improvements must materially add value to your home, prolong your home's useful life, or adapt your home to new uses. These may include, but are not limited to the following: adding a new room, upgrading a roof or installing a home security system.

Small scale improvements such as painting a room, replacing a toilet or fixing a leak do not qualify as a home improvement and are considered a home repair. These are not tax deductible.

Unlike the other examples in this post, you cannot claim home improvement deductions in the year you paid them. Home improvement deductions only come into play when you sell your home, and works by reducing your overall gain at the time of sale.

BeSmartee TipTip: When many small repairs are combined into a larger project, such as extensive remodeling, the entire project can be considered a home improvement. If you suffer a casualty and your home is damaged, the money spent on repairs to restore your home is considered a home improvement.

6. Home Sale Tax Exclusion

Although not technically a tax deduction, the gain you make when you sell your principal residence is tax free up to $250,000 if you're single, and up to $500,000 if you're married and file jointly.

The IRS has specific rules as to how you can exclude the gain from your income, but the most important rule to understand is that your home must be a primary residence, meaning that you have owned and lived in the home for at least two of the five years leading up to the sale.

BeSmartee TipTip: You don't have to be currently living in the property at the time of sale to qualify. Additionally, if you're a renter and later purchase the property you've been renting, the time you've already spent in the home as a renter counts towards the two year ownership and use rule.

Final Thoughts

Laws change all the time when it comes to tax deductions. What was available last year may not apply today. During the 2008 home crisis there were many tax breaks that people were able to benefit from, but as of 2014 many of those tax breaks will expire.

Be sure to consult with your tax professional for clarification so you don't count on any tax deductions that are expiring, or miss out on tax deductions you don't know about.


Real Estate Commission: Explained, Revealed and Compared
By Arvin Sahakian · Aug 17, 2015 · Real Estate Data

Real estate agents receive commissions from home buyers and sellers, collectively earning over $50 Billion per year. Learn how commission amounts are set, who pays them, and how they work in this article. Read more.

197,736

California Property Tax: Complete List by County 2014-2015
By Tim Nguyen · Nov 26, 2014 · Real Estate Data

List of secured property tax rates for all counties of California fiscal year for 2014-2015. Read more.

126,863

California Proposition 60 and 90: Your Complete Guide
By Tim Nguyen · Nov 28, 2014 · Real Estate Data

If you live in California and are over the age of 55 you can effectively reduce your property taxes when buying a new home. Read more.

66,402

What to Expect During the Home Loan Closing Process
By Arvin Sahakian · Feb 24, 2015 · Mortgage

You've heard the term used before, but what does loan closing mean? Find out all you need to know about the process. Read more.

54,310

The Surge in Foreign Real Estate Investment in the United States
By Laura Agadoni · Feb 24, 2016 · Real Estate

Foreign real estate investment in the United States, both commercial and residential, is a huge phenomenon that is only expected to accelerate, maybe even to skyrocket, in 2016. Read more.

50,343

Houston vs. Dallas: Which One is Better to Live in?
By Amanda Curry · Oct 11, 2016 · Real Estate

Houston Vs. Dallas? If you are considering moving to either of these major metropolitan areas, we've created a resource to help you make the decision process a little easier. Read more.

49,087

5 Illegal Borrowing Activities: Things That Are Illegal When You Try to Get a Home Loan
By Laura Agadoni · Jan 22, 2016 · Mortgage

Whenever there is money to be made or money to be spent, some unscrupulous folks will take advantage, trying to game the system or commit all-out fraud. Read more.

48,433

Does Homeowners Insurance Pay Off your Mortgage if the House is Burned Down?
By Amanda Curry · Feb 8, 2017 · Mortgage

In this article, we explore how homeowners insurance works and what happens in the event of a house fire. Read more.

25,809

16 Ways to Improve Your Debt-to-Income (DTI) Ratio
By Veronica Nguyen · Nov 29, 2014 · Mortgage

Your DTI is used by mortgage lenders to determine whether you qualify for a loan, and if so, for how much. Improve your DTI with these 16 tips. Read more.

25,338

5 Tips on Getting a Mortgage Loan after Bankruptcy
By Veronica Nguyen · Apr 15, 2015 · Mortgage

A bankruptcy will make it very difficult to attain a home loan. These 5 tips will help you re-establish your credit quickly in order to qualify for a home loan. Read more.

20,782