The IRS defines a home as any house, condominium, cooperative, mobile home, boat, or similar property that has sleeping space, toilet facilities, and cooking facilities. Some homeowners qualify for these deductions.
Real Estate Taxes
You can deduct real estate taxes assessed on all the real estate you own. You are not limited to the tax on just one or two homes.
- Only the amount actually paid is deductible. Don’t confuse this amount with deposits made to your mortgage escrow account.
- Charges for trash collection, sewer, etc., are sometimes added to real estate tax bills. These amounts are not deductible as real estate taxes.
- Special assessments are sometimes added to real estate tax bills. Assessments are not necessarily deductible as real estate taxes.
If you borrow money to buy, build, or substantially improve your main or second home, the mortgage interest may be claimed as an itemized deduction on Schedule A.
Debt Type and Limit Definition
- Acquisition debt: $1,000,000 Used to buy, build, or substantially improve a main or second home.
combined debt on main and
second home ($500,000 MFS)
- Home equity debt: $100,000 Debt secured by a main or second home that is not acquisition debt.
combined debt on main and
second home ($50,000 MFS).
Debt that is refinanced generally retains its character as acquisition or home equity debt, up to the old loan balance.
- Debt used to substantially improve your home is acquisition debt, even if it is refinanced home equity debt.
- Refinanced acquisition debt that exceeds your old debt may qualify as home equity debt.
Terms such as points, loan discount, loan origination fees, etc., refer to certain charges you might pay in order to obtain a mortgage. If you pay points to borrow money, the points are deductible as prepaid interest.
- Points are deductible ratably over the life of your loan. Points you pay at the time of your home purchase are deductible in full.
- Points you pay to the lender in exchange for a lower interest rate are generally shown on your closing statement. Each point charged to obtain a loan is 1% of the loan amount. For example, 2.5 points charged on a $100,000 loan equals $2,500 ($100,000 × 2.5%).
- Fees your lender charges for specific loan services are not deductible. Examples include appraisal, notary, and document fees.
Mortgage Insurance Premiums
Premiums paid for acquisition indebtedness for insurance contracts issued after December 31, 2006, on a first or second home are treated as deductible mortgage interest. The deduction begins to phase out when AGI exceeds $100,000 ($50,000 MFS). Qualified mortgage insurance providers include the Department of Veterans Affairs, the Federal Housing Administration, or the Rural Housing Service, and private mortgage insurance.
Your lender will generally give you Form 1098, Mortgage Interest Statement, to tell you how much interest you have paid.
- An explanation must be attached to your tax return if the amount shown on Form 1098 is different from the deducted amount or if more than one person paid deductible mortgage interest (other than a spouse filing jointly).
- If you did not receive Form 1098, you must provide the name, identifying number, and address of the interest recipient
A home mortgage is any loan secured by your main or second home, including first and second mortgages, home equity loans, and refinanced loans. The loan must be legally recorded, with the home as collateral for the debt. You must be legally liable to make the payments. For example, if you borrow money from your parents to make a down payment on your home, you cannot deduct
the interest you pay them unless the loan is legally recorded with the home as collateral.
You may generally deduct the mortgage interest on your main home and a second home, up to the limits described below.
- A loan secured by a third home is a personal loan and the interest is not deductible. Interest on a third home used exclusively for business might be deductible as a business expense.
- Your mortgage interest deduction is limited, based on the type of debt you have. Note: Slightly different rules apply to mortgages taken out before October 14, 1987. The deduction expires for premiums paid or accrued after December 31, 2016.
Medical Expense Deductions
You may need to make home improvements in order to provide medical care for yourself, your spouse, or your dependent. Examples: (1) Lifts or elevators, (2) therapy pool for help with a specific medical condition, (3) bathroom or countertop modifications to accommodate a person who is disabled, (4) ramps, handrails, support or grab bars, (5) modifications to halls and doorways.
An expense may generate a medical deduction to the extent the expense does not result in an increase to the home’s value. Not every expense results in such an increase.
Operation and Upkeep
Amounts you pay to operate and maintain a medically related home improvement qualify as medical expenses if the main reason is for medical care. This is true even if only part or none of the asset cost qualified for a deduction.
Other Itemized Deductions
Casualty and Theft Losses:
If your home is damaged or destroyed due to an identifiable event that is sudden, unexpected, and unusual, you may have a casualty loss. Losses are calculated on Form 4684, Casualties and Thefts, and carried to Schedule A, Itemized Deductions.
Business Use of the Home:
If you use a home office as an employee, you may be able to claim a miscellaneous itemized deduction for the business use of your home.
- You must use your home office for the convenience of your employer.
- You may not rent your home office to your employer
If you need assistance with your itemzed deductions on your 2017 tax return contact the professionals at Wealthnest Tax Services.