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What tax advantage do I get by owning real property?
The major advantage to owning real property comes from the availability to deduct the interest of a home mortgage and a home equity loan. In order to qualify for an income tax deduction for interest paid on a mortgage:
(1) "acquisition indebtedness" incurred in acquiring, constructing or substantially improving a qualified residence secured by the residence, is subject to a $1,100,000 aggregate loan amount limitation
(2) "home equity indebtedness" (other than "acquisition indebtedness") secured by a qualified residence to the extent that the amount of the loan does not exceed the fair market value of the qualified residence reduced by the amount of the acquisition debt, subject to a $100,000 aggregate loan amount limitation.
(3) "qualified residence" means your principal residence and one other residence (such as a vacation home) that is not rented to others.
The interest that you pay on a mortgage for your home, your vacation home, and for a home equity loan can be deducted from your income. In order to take the deduction, Schedule A (Itemized Deductions) must be completed and attached to your 1040 Federal Income Tax Return. Many states likewise enable you to take a deduction from your taxable income for interest paid on your home, qualified vacation home and qualified home equity loans.
Real estate taxes are also deductible on your federal return. Deductible real estate taxes are any state, local, or foreign taxes on real property levied for the general public welfare. The taxes must be based on the assessed value of the real property and must be charged uniformly against all property under the jurisdiction of the taxing authority. Deductible real estate taxes generally do not include taxes charged for local benefits, trash and garbage pickup fees, transfer taxes, homeowners’ association charges and rent increases to higher real estate taxes.
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