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What are the Different Real Estate Deductions?

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  • Written By: Adam Hill
  • Edited By: Bronwyn Harris
  • Last Modified Date: 15 September 2016
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United States tax law provides for various real estate deductions. In general, there are more real estate deductions available to a homeowner than to someone who rents his residence. One of the biggest deductions that can be taken is for mortgage interest. Home repairs often apply too, as well as the interest on a second mortgage taken out to pay for the repairs. When a tax return is being prepared, real estate deductions can add up significantly, reducing one’s tax liability and potentially saving a large some of money in this way.

As mentioned, the best known of all real estate deductions is for the payment of mortgage interest. A portion of each mortgage payment comes from the interest that has accrued on the loan within the past month. This amount can be added up and deducted from a homeowner’s tax liability, providing significant savings, especially for new homeowners. The longer you pay off a mortgage, however, the less valuable the deduction will be, because as the loan balance decreases, so will the portion of the monthly payment that represents accrued interest. If you decide to pay off your mortgage before its term is up, you may be subject to an early payoff penalty, but this penalty is also tax-deductible.

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There are real estate deductions available to people who use part of their home as an office, if they use it for work purposes only. In this case, the percentage of the home that is taken up by the office is the percentage of utility and repair bills that can be deducted. These household costs cannot be deducted under other circumstances.

Home repairs and upgrades are tax-deductible in many cases. For example, if your home is damaged in a natural disaster or a robbery, and the damage is not covered by insurance, the repairs are fully deductible. In the case of a natural disaster area that receives federal aid, the previous year’s tax return can be amended to claim the loss. If the damage is partially covered, some rules do apply, but there is usually still a deduction available. Home improvements may also qualify, so it’s a good idea to keep the receipts from purchases that allowed you to finish a basement or install a backyard pool, as these can be used to reduce the capital gains tax that applies when you sell the home.

In certain circumstances, it is possible to deduct moving expenses if you relocate because of a job. Essential expenses incurred while moving, such as hotel rooms and moving vans can often be deducted, and these can add up to a large sum as well. When it comes to itemizing these deductions as well as those from home improvement projects, the counsel of a certified public accountant (CPA) can be very valuable. Otherwise, tax laws governing deductions can quickly become confusing.

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