Real estate tax deductions for homeowners have experienced significant scrutiny, proposals, extensions, modifications and extensions throughout a tumultuous real estate cycle over the past decade. As federal income tax season approaches, it is useful to take a closer look at the current state of the nine real estate tax deductions most frequently used by homeowners.
1. The Mortgage Interest Deduction
The mortgage interest deduction is widely popular since homeowners’ monthly mortgage payments are almost entirely composed of interest for the first few years of a loan. Homeowners can deduct the interest paid on a mortgage with a balance of up to $1 million.
2. Energy Efficiency Upgrades Deduction
10% of the total cost of materials to make energy efficient upgrades to a home can also be deducted up to a maximum amount of $1,500. Actually this is a tax credit that directly reduces of how much tax is owed, rather than just a reduction in taxable income.
3. The Private Mortgage Insurance (PMI) Deduction
Homeowners who pay less than 20% as a downpayment to purchase a home are required to pay Private Mortgage Insurance. PMI, also referred to as MIP, can represent a significant amount of a borrower's monthly payment.
Borrowers with an adjusted gross income under $109,000 that are paying PMI on loans originated after January 1, 2007 can deduct the PMI at 10% per $1,000 of loan principal borrowed.
4. Home Improvement Loan Interest Deduction
The interest on home equity loans of up to $100,000 used to make “capital improvements” to a home are also tax deductable. Capital improvements include upgrading features, installing new components or making additons that increase the home's useable square footage. Upkeep and maintenance repairs like painting and installing new carpet are not deductible.
5. Mortgage Points/Origination Deduction
Homeowners who have paid origination fees or "points" when they purchased or refinanced their home can deduct the amount paid. These fees are customarily charged by a lender on a percentage basis, so a one percent fee on a $200,000 loan would amount to one point or $2,000.
6. Property Tax Deduction
Although it may sound strange, property taxes are a tax deductible tax. Property taxes paid to local governments can be deducted on federal income tax returns.
7. Loan Forgiveness Deduction
The Mortgage Debt Forgiveness Relief Act of 2007 has been extended through December 31, 2013 for underwater homeowners that sell their homes for a price "short" of what is owed against the property. The Debt Foregiveness Act prevents the homeowner from having to pay tax on the amount forgiven by the lender.
Mortgage Debt Forgiveness Relief Act Extended
with Ryan Overmyer
For example, a family sells their home for $150,000 even though the principal balance of their mortgage is $250,000. The $100,000 difference forgiven by the bank would have been considered taxable income prior to the Mortgage Debt Forgiveness Relief Act.
8. Profit on Sale of Real Estate Deduction
On the sale of a primary residence, individuals can claim up to $250,000 of profit from the sale without paying tax. Married couples can claim up to $500,000 tax-free.
9. Real Estate Selling Cost Deduction
Many of the costs associated with selling a home can also be claimed as tax deductions. These costs are effectively added to the price initially paid for the home by effectively raising the tax "basis" to an amount that reduces the taxable profit when compared to the new selling price. Some deductable selling costs include: fees and commissions paid at closing, marketing costs to advertise the home for sale, and the cost of most repairs or upgrades needed to sell the property.
