Homeowner Tax Deductions for Mortgage Interest and Property Taxes
Author: Frank Addessi
Is the interest on my mortgage deductible and what about my property taxes? During tax season these are two of the most common questions we get asked and the answer to both is yes. As long as you understand the rules that apply to what qualifies as mortgage interest and what are property taxes.
Your property taxes are paid to your local municipality, county or school district and sometimes a combination of two or more. Property taxes are fully deductible on your federal income tax return so long as you itemize your deductions on a Schedule A.
Since many municipalities include other items on your tax bill it is important to understand what portion is actually deductible as property taxes. The rule is that you may deduct the amount you are assessed value of the real property and the taxing authority, the state or local government, charges a uniform rate on all property in its jurisdiction. The tax must also be for the general welfare of the public and not a payment for a special privilege or service.
It is important to remember that you can only deduct what you have paid and not what you have been billed or assessed. There are some things that may appear on your property tax bill that are not deductible even though your municipality includes them on the same notice or bill.
Non-deductible items that the IRS defines as "unit Fees Paid for the Delivery of a Service, such per gallon of water used". Garbage collection or snow removal are not allowable as deductions. Some municipalities may also include the cost of trimming trees on residents property on property tax bills but they are not deductible.
Your mortgage payment has two basic components, interest and principal. Principal payments come right off the total amount of the loan, this is how the loan gets paid off. The larger portion, two thirds or more, especially on young mortgages is interest. Interest is the amount the bank charges you for using their money. It is not unusual for some to be confused and mistakenly believe that their entire mortgage payment is deductible. It is not, only the interest is.
Second mortgage interest is deductible in most cases provided it complies with IRS rules. Interest on second mortgages may be deducted if that mortgage is secured by your primary or second home or if it was used to make improvements to your home, such as a new roof. Qualified home equity loan interest is also deductible and the proceeds can be used for anything you choose, like a new car.
If you are fortunate enough to own a second home interest on that mortgage is also deductible from your income provided it meets certain requirements. To qualify for deductibility your must treat the second home as a home and that means it can not be a rental property. However you can rent all or part of your second home if "You must use this home more than 14 days or more than 10% of the number of days during the year that the home is rented at a fair rental, whichever is longer. If you do not use the home long enough, it is considered rental property and not a second home. For information on residential rental property, see Publication 527."
Many urban residences are multi-family homes in which there are two or more separate residences, apartments and only one is occupied by the mortgage holder. The IRS allows the mortgage interest deduction if the following conditions are met:
The rented part of your home is used by the tenant primarily for residential living.
- The rented part of your home is not a self-contained residential unit having separate sleeping, cooking, and toilet facilities.
- You do not rent (directly or by sublease) the same or different parts of your home to more than two tenants at any time during the tax year. If two persons (and dependents of either) share the same sleeping quarters, they are treated as one tenant.
As with all tax matters, if you are uncomfortable with the particulars of your situation it's probably worth the expense to hire a professional like a CPA to assist you with your tax return. Mistakes can be costly and are almost always completely unnecessary.
Article Source: http://www.articlesbase.com/taxes-articles/homeowner-tax-deductions-for-mortgage-interest-and-property-taxes-6098779.html
About the AuthorI have been writing about taxes, tax prearation and accounting related topics for 10 years. As the manager of CPA Tax Center a full service CPA firm specializing accounting, bookkeeping and income tax preparation services for individuals and businesses. We also offer online tax preparation.
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