If you own a home, whether it’s a single-family resident, mobile home, or townhouse, there are certain deductions you can take when filling your income taxes with the Internal Revenue Service. To take the deduction, you must itemize your deductions on Schedule A (Form 1040), which means you cannot take the standard deduction. Itemizing may take longer and seem more complex, but it may be worth it if you can reduce the amount of your taxable income.
1. Real Estate Taxes
Most state and local governments impose a yearly tax on the value of real property, otherwise known as a real estate tax or property tax. The federal government allows you to deduct these taxes if they are based on the assessed value of the real property and the taxing authority charges a uniform rate on all property in its jurisdiction. If you paid these taxes out-of-pocket, you will need to find your bills in order to determine how much you paid. If you have an escrow account, the money cannot be deducted until it is actually used to pay taxes.
Real estate expenses that you may not deduct include any charges for services to a property, even if the charge is paid to the taxing authority. Such charges include a unit fee for delivery of a service, like water usage, or a periodic charge for a residential service, like trash collection.
2. Home Mortgage Interest
If you own a home, it’s likely that you took out a mortgage in order to buy the home, which means you pay monthly mortgage payments in addition to the interest payments. Perhaps the greatest tax break you get as a homeowner is deducting those interest payments from your taxable income. However, there are some exceptions. Your deduction will be limited if your total mortgage balance is more than $1 million, or $500,000 if married filing separately, and it may also be limited if you took out a mortgage for reasons other than buying, building or improving your home.
Another requirement to take the deduction is that the interest you pay has to be on a loan secured by your main home or a second home in order to be deductible. Make sure you keep Form 1098, which your lender will issue to you. This form tells you how much you can deduct and also serves as proof if you are ever audited.
“Points” refer to charges paid by a borrower to obtain a home mortgage. They are also known as loan origination fees, maximum loan charges, loan discount or discount points. These points are prepaid interest and can be deductible as home mortgage interest. As such, similar rules apply, including the $1 million mortgage value limit. You may deduct these points during the year that you paid them as long as the loan is secured by your main home and the points system is an established business practice in your area, among other requirements. However, if you refinance your mortgage, you must deduct the points over the life of the loan.
(Also read: When To Refinance A Mortgage And How To Do It.)
4. Mortgage Interest Credit
For certain lower-income individuals, a mortgage interest credit might be available. This credit was designed to help these individuals afford a home, if purchasing for the first time. To be eligible for the credit, you would have to apply for and receive a qualified Mortgage Credit Certificate from your state or local government.
What You Cannot Deduct
Expenses associated with owning a home that you cannot deduct include fire or homeowner’s insurance premiums and the amount applied to reduce the principal of your mortgage. Others types of home insurance, payments for domestic help, and the cost of utilities are also non-deductible.
If you plan to take any of these deductions or credits, it is important that you save all of your records associated with purchasing a home. These will help you know exactly what to report and will also serve as proof, should you ever be audited. Records you should keep include any purchase contracts and settlement papers if you bought the property. If you did not buy it, you would need to keep any papers showing the property was received as a gift or an inheritance, or however you received it. You should also keep any checks and receipts you made or received in connection with owning a property.
(Also read: 9 Different Types Of Non-Taxable Income.)
Although it may seem like a lot of work to save and keep track of your records and figure out what exactly you can deduct, it may be worth it in order to pay fewer taxes and save some of your hard-earned money. If you are unsure whether you should deduct your homeowner expenses or if you don’t know what deductions you are eligible for, you can visit the IRS website at IRS.gov for further information. You can also call its toll-free tax assistance line at 800-829-1040.