Tax Benefits of Real Estate
Realtors are quick to point out that home ownership allows a lot of tax advantages not available to someone who merely pays rent. A homeowner, whether you own a condo or luxury real estate in Beverly Hills, can deduct points used to obtain a mortgage when buying a home, mortgage interest paid during the year, and property taxes.
Your Biggest Deduction – Interest
If you have a mortgage on your home, the loan is probably “fully amortized.” This means a portion of your monthly payment actually repays the debt and another portion pays the interest. After a scheduled period of time your real estate mortgage is paid off.
If you itemize deductions using a Schedule A, the interest portion of your mortgage payment is usually tax deductible.
There are home ownership tax deduction benefits, but of course there must be certain conditions met in order to qualify.
The first condition is that your primary residence or a second home must be collateral for the loan.
Your home can be a house, co-op, condominium, mobile home, trailer, or even a houseboat. For trailers and houseboats, one requirement is that the home must have sleeping, cooking, and toilet facilities.
Even a rental can be considered a second home, provided you live in it either fourteen days out of the year or at least ten percent of the number of days you rent it for, whichever is greater.
Interest as a Tax Deduction
At the end of each year, your lender should send you a form 1098. This form tells you how much you paid in interest and points during the year. This is your deductible interest, provided you meet certain conditions.
If you obtained the loan prior to October 13, 1987, the loan is considered “grandfathered.” All interest paid on grandfathered loans in a given year is fully tax deductible. After that, there are conditions, but most conditions won’t apply to most real estate homeowners.
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Deducting Property Taxes
Most homeowners pay property taxes to a local, state or foreign government. In most cases, property taxes are deductible. They must be charged uniformly against all property in the jurisdiction and must be based on the assessed value.
Many states and counties also impose real estate property taxes for local improvements to property, such as assessments for streets, sidewalks, and sewer lines. These taxes cannot be deducted. Local property taxes are deductible only if they are for maintenance or repair, or interest charges related to those benefits.
Many mortgages have impound or escrow accounts. The borrower’s payment exceeds the amount necessary to pay the principal and interest. The excess goes into an account used to pay property taxes, homeowner’s insurance and mortgage insurance.
When calculating your property tax deduction, don’t deduct what you pay into that account. Only deduct what is paid from the account to the taxing authority.
Limits on Deductions
You may be subject to a limit on some of your itemized deductions. For 2000, this limit applies if your adjusted gross income is more than $128,950, or $64,475 if you are married filing separately.
Certified Public Accountants
Whenever you reach a point where you begin itemizing deductions, it is best to have your tax returns prepared by a Certified Public Accountant. Internal Revenue Service rules and regulations can quickly become confusing.
For tax advice regarding home ownership, contact a certified financial planner or tax professional. For a list of available homes for sale, contact LeMark Realty today.
Terry Light of RealEstate ABC