Real Estate Tax Deductions include Real Estate Taxes, Home Mortgage Interest Deductions, and Points
As a homeowner, you have the ability to take advantage of several “routine” real estate tax deductions available to you by the IRS. These tax deductions, or general tax breaks, have been called “plain vanilla tax deductions” but don’t let the name fool you. If you are a homeowner, proper tax planning required a understanding of these fundamental tax deductions and the rules behind them. The general real estate tax deductions available to you, the homeowner, are real estate taxes, home mortgage interest, and points.
Real Estate Tax Deductions for all Property Owners
- Real estate taxes – also known as property tax, this is the annual tax that most state and local governments charge on the value of real property.
- Home Mortgage Interest Deduction – Most homebuyers take out a mortgage (loan) to buy their home. They then make monthly payments to either the mortgage holder or someone collecting the payments for the mortgage holder. A portion of your payment actually repays the debt and another portion pays the interest on the loan. You can usually deduct the entire part of your payment that is for mortgage interest if you itemize your deductions.
- Mortgage Points – Lender fees associated with getting a mortgage. Each point equals 1% of the loan principal. One to three points are common on many home loans, which can easily add up to thousands of dollars.
Again, you can deduct your real estate taxes and home mortgage interest payments only if you itemize your deductions instead of using the standard tax deductions available to you. Most homeowners who pay real estate taxes and home mortgage interest will pay less income tax if they itemize their tax deductions as opposed to taking the standard IRS deduction. When in doubt, discuss with your accountant how real estate tax deductions affect your tax liability!
First-Time Homebuyer Credit
The first time homebuyer tax credit is no longer allowed. However, a credit claimed for a 2008 home purchase must be repaid in 15 installments, and repayment is generally accelerated if the home is sold or no longer used as a principal residence. There are exemptions, however.
3% Phaseout Rule
Your home mortgage interest deduction and real estate tax deductions are limited if, in 2014, your adjusted gross income exceeds $254,200 ($152,525 if married filing separately). If this is the case, your real estate tax deductions are subject to the 3% reduction of itemized deductions.
Residential Energy Efficient Property Credit
You may be able to take a credit of 30% of your costs of qualified solar electric property, solar water heating property, and fuel cell property. This includes labor costs properly allocable to the onsite preparation, assembly, or original installation of the property and for piping or wiring to interconnect such property to the home. This credit is limited to:
- $2,000 for qualified solar electric property costs.
- $2,000 for qualified solar water heating property costs
- $500 for each one-half kilowatt of capacity of qualified fuel cell property for which qualified fuel cell property costs are paid.
Generally, you can elect to deduct state and local general sales taxes instead of state and local income taxes as an itemized deduction on IRS Schedule A (Form 1040). Deductible sales taxes may include sales taxes paid on your home (including mobile and prefabricated), or home building materials if the tax rate was the same as the general sales tax rate.
Note that if you elect to deduct the sales taxes paid on your home, or home building materials, you cannot include them as part of your cost basis in the home.