Tax Deductions for Homeowners


What’s Deductible?

Interest on your mortgage

Savvy homeowners are able to deduct the interest on up to $1 million of acquisition mortgage debt, i.e., any mortgage used to acquire, build and/or improve a property.

Whether you pay it to a lender or to a home seller or other party, Homeowners are able to deduct interest on up to $100K of home equity debt.  Home equity debt is any cash-out proceeds from either a mortgage or home equity loan/line of credit that is not used to substantially improve the property.

For interest to be tax deductible for either acquisition or home equity interest, the mortgage must be attached to a “qualified” residence. An individual may have up to two qualified residences–a primary and vacation home–for tax purposes


Property taxes

Your property taxes are completely deductible for any number of personal residences you own, but special government fees such as water or sewer assessment may not be. (If you own rental properties, real estate taxes on them are deducted on Schedule E where you report rental income.)


Loan points

Points are fully deductible for a purchase mortgage of your primary residence, in the year that you pay them even if you persuade the seller to pay your points for you.

Refinancing points. Generally, points paid when refinancing are deducted over the term of the loan. But if you refinanced a loan that you previously refinanced, you can deduct in full the as-yet-undeducted points remaining on the prior loan. There’s a catch, however: If you refinanced with the same lending bank (same broker is okay), the remaining points must be amortized over the term of the new loan.


What Isn’t Deductible?

  • Home improvement expenses
  • Homeowner and co-op dues
  • Insurance expenses

Retirement Savings and Real Estate

Saving for a down payment is the most tax-effective way to buy a home compared to using your retirement savings. But tax rules have been relaxed somewhat to allow cash-strapped first-time buyers to tap these funds without paying the 10 percent penalty on early withdrawals.


IRA Funds

You now can draw up to $10,000 penalty-free from a conventional individual retirement account or a Roth IRA to buy your first home as long as you purchase your home within 120 days of withdrawing the funds. If you’ve owned a home before, but not in the past two years, you also qualify to make this withdrawal. You still pay state and federal income tax, however, which can cut that amount significantly. If you are in the 28 percent federal tax bracket, for example, you would net $7,800 on your withdrawal to go toward your home purchase, including the down payment and the closing costs listed above. Add in any state income tax and it would be less. The Roth IRA comes with other caveats as well:

Roth IRA payouts for first time homebuyers

Because the rules for the Roth IRA allow you to withdraw contributions at any time without penalty, the Roth can be a powerful tool for saving for a first home. Say you and your spouse each put $5,000 a year into a Roth for five years. The entire $50,000 could be withdrawn tax- and penalty-free for a down payment and, because the accounts have been opened for at least five years, up to $10,000 of earnings can be withdrawn tax- and penalty-free if used to buy your first home.

Deduct income not contributions

Contributions to a Roth IRA are not deductible, but you don’t pay taxes on qualified distributions.

Must wait five years

To be qualified for a Roth IRA, a distribution (withdrawal) must be made five taxable years after the first contribution to the account was made. In addition, the distribution must meet at least one of the following conditions:

  • Money used to buy first home
  • Withdrawal made after account-holder is 59
  • Withdrawal made because account-holder becomes disabled
  • Money distributed to beneficiary after account-holder’s death

Limits on the contribution

You can contribute up to $3,000 a year to an account, but only if you’re a single tax-filer with adjusted gross income of less than $95,000 or joint filers with combined income below $150,000.

Convert your existing IRA carefully

The new tax law permits you to convert your existing individual retirement account into a Roth IRA if your adjusted gross income is less than $100,000 and you are not married and filing separately. Any amount that would have been taxable as income when withdrawn from the existing account will be taxed. There are other limits; consult a tax professional for details.


401(k) Plans

If you are participating in your employer’s tax-deferred retirement plan, you can borrow up to a specified limit from that account penalty-free to buy a house for yourself or for a relative. A relative who participates in such a plan also can draw from his or her account to give to you as a gift or loan to buy a home. Tapping 401(k) funds isn’t as easy as it sounds, however. Because you do have to pay the money back, your lender will count it as outstanding debt when calculating your income-to-debt ratios. If you are carrying too much other debt, you could be disqualified for your loan.


Capital Gains

Rate (2008-2010) is 10%-25% depending on your tax bracket.


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