Owning real property comes with numerous advantages, with tax deductions being among the most prominent. Often the interest from home mortgage payments and a home equity loan can be deducted on one’s tax forms. However, to reap benefits from your monthly mortgage payments, you first have to become familiar with a few terms, namely acquisition indebtedness, qualified residence, and home equity indebtedness (if you took out a home equity loan).
Real Estate Mortgage Payments, Qualifications, and Terms to Know
"Acquisition indebtedness" refers to the debt incurred when acquiring, constructing or substantially improving a “qualified residence.” A "qualified residence" refers to your principal residence and one other residence from which you receive no rental income.
"Home equity indebtedness" refers to debt secured by a qualified residence to the extent that the amount of the loan does not exceed the fair market value of that residence. The value of this debt is reduced by the amount of the acquisition debt (see above), and is subject to a $100,000 aggregate loan amount limitation. However, a home equity loan could also count as acquisition indebtedness if used to substantially improve a home and increase its value, therefore not all home equity loans are subject to the $100,000 aggregate loan amount limitation.
Itemizing Tax Deductions for Real Property Owners
Deductions for mortgage interest and home equity interest may be deducted using Schedule A if you have sufficient itemized deductions to use Schedule A. With today’s low interest rates and higher standard deductions many taxpayers are finding that they are unable to take advantage of Schedule A deductions. Their standard deduction ends up being higher. When a taxpayer can utilize the deductions they are available for both their primary residence and one vacation residence or secondary family home. With electronic filing a Schedule A will automatically generate if the deductions can be utilized. If you file a paper return it must be attached to your 1040. Some states also offer similar deductions.
Deducting Real Estate Taxes in a Federal Return
Deductible real estate taxes are any state, local, or foreign taxes on real property that are levied for the general public welfare. To be deductible, the taxing authority must have taxed you based on the assessed value of the property. Additionally, the levied taxes that are based on this assessed value must be charged consistently across all property within the same jurisdiction. For more information on tax deductions for your particular property, consult a licensed, experienced real estate lawyer in your jurisdiction. An experienced tax attorney would also be useful.
Real estate taxes may also be deductible for real property that is used for rental activities. That would be deductible on Schedule E.
Real estate taxes may be deductible for property used for commercial purposes. That would be deductible on Schedule C for sole proprietors and forms 1120, 1120S, 1065, etc, for business entity filers.