If you're a homeowner, the mortgage interest deduction may have a special place in your heart, along with your mother, your favorite baseball team, and apple pie.
You probably also know that your mortgage interest isn't your only deductible home expense. You may be able to cash in on a bunch of other breaks, too. But, like all things related to taxes, they come with some strings attached.
Home equity debt
That home equity loan you used for college tuition or medical bills can sidle up right next to your regular mortgage interest payments on your tax forms. That's right -- your interest on that debt can be deductible, too.
When it comes to regular mortgage interest, you've got lots of room to maneuver -- $1 million worth of room, to be precise. You can deduct interest on first- and second-home mortgages up to that limit. When it comes to home equity debt, however, the tax collectors get less generous.
You're limited to deducting the interest on $100,000 in home equity debt, or the difference between the home's fair market value and the amount still owed on your mortgage. You guessed it: You have to go with whichever calculation amounts to less.
Many homeowners can deduct certain prepaid mortgage or refinancing fees, which are also known as points. A point amounts to 1% of the value of the loan. But the rules differ, depending on whether you just bought your home or are refinancing an existing mortgage.
You can fully deduct your points paid in the year you paid them if you bought or built your primary home, and if you did not pay them in lieu of other fees like appraisal fees, inspection fees, title fees, attorney fees, or property taxes. The points should be clearly shown on your settlement statement.
Generally, if you paid points to refinance your mortgage, you must spread your deduction out over the life of the loan. However, if you used part of your refinancing proceeds to improve your home, you can probably deduct them in the year of the loan.
Sound complicated? It is, and it puts the onus on homeowners to figure out when to deduct points paid, and to remember to deduct that annual portion of any pro-ratable points every year when you file your tax return.
As many people in certain parts of the country watch their real estate taxes rise, they may be taking a little comfort in knowing that those expenses can be deductible, too.
The catch here is that to be deductible, any tax on the value of your real estate has to be for the welfare of the general public. Many homeowners' real estate taxes also include user fees and special assessments for local improvements, like the construction of streets, sidewalks, or water and sewer systems. To make it even more complicated, you may be able to deduct assessments to maintain or repair your local improvements.
It's easy to get this one wrong. The tax experts who advise Congress say it's easy for homeowners to make mistakes in this area, because property tax bills don't often break out the tax-deductible charges from the non-deductible fees. They've recommended that local governments be required to report those differences. Until they do, however, it's up to you to get it right.
You can learn more about the tax and other advantages of homeownership in the Fool's Home Center, and by reading these other Foolish articles:
- Buy a Home, Save on Taxes
- Deduction Dangers of Home Mortgages
- Avoid Paying Taxes When You Sell Your Home
For more about taxes generally, take a look at the Fool's Tax Center. You'll find information about everything from home-related deductions to all sorts of other tax breaks that may save you thousands of dollars.