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Is There a Real Estate Tax Deduction?

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  • Written By: N.M. Shanley
  • Edited By: Michelle Arevalo
  • Last Modified Date: 12 September 2016
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Homeowners may benefit from a special real estate tax deduction if they have an outstanding mortgage. This includes interest from a primary home mortgage and a second home mortgage. Different real estate tax deductions are available when buying or selling a home.

Mortgage interest is tax deductible for the tax year in which it is paid. To qualify for this real estate tax deduction, homeowners must itemize their tax return deductions using Internal Revenue Service (IRS) form 1040 Schedule A when filing a tax return. There is an additional tax return deduction that can be listed on Schedule A, the home office tax deduction.

If part of a home is used as a business office only, the owner may qualify for the home office real estate tax deduction. The homeowner must calculate the square footage to calculate how much of the mortgage covers this part of the home. When the home office deduction is used, the office area cannot be included in the mortgage deduction.

Basically, this means the owner cannot take two different tax deductions for the same part of the house. Restrictions and limitations apply when using the home office deduction. If the owner does not qualify for the home office deduction, then the mortgage deduction can still be used for this area of the home.

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People that have a mortgage on a second home can also use the mortgage deduction. If the home is a rental property, the owner must use it for at least part of the year to qualify for the deduction. If the home is not rented out, the owner qualifies for the deduction whether or not the owner lives in the home at all during the year.

Other tax deductions are available when people buy or sell a home. Buyers sometimes pay points when purchasing a home to lower the mortgage interest rate. Points are prepaid interest and typically equal 1% of the mortgage amount. These points are tax deductible in the year in which they are paid.

If a homeowner is refinancing an existing mortgage, different rules apply. Any points paid are still tax deductible, but the deduction is spread out over the life of the loan. For example, a home is refinanced and the owner pays three points, or $4,000 US Dollars (USD) on a 20-year loan. The homeowner divides the $4,000 USD by 20 years to calculate the annual points real estate tax deduction. This homeowner can deduct the mortgage interest plus $200 USD on the tax return each year for the next 20 years.

When a home is sold, the seller can deduct costs associated with the sale from the sale’s taxable income amount. These costs can include advertising, closing costs charged by the lender, and real estate agent commissions. The cost of major home improvements completed to make the home ready for sale may also be included in this real estate tax deduction.

Actual real estate tax deduction amounts will vary based on IRS eligibility requirements. IRS regulations are typically updated every year. Property owners can consult the official IRS website, or a tax professional, when calculating any real estate tax deductions prior to filing a tax return.

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