Tax Deductions for Real Property Owners
UPDATED: January 30, 2019
It’s all about you. We want to help you make the right legal decisions.
We strive to help you make confident law decisions. Finding trusted and reliable legal advice should be easy. This doesn't influence our content. Our opinions are our own.
Owning real property comes with numerous advantages, and tax deductions stand out among them. Often the interest from home mortgage payments and a home equity loan can be deducted, as well as points for a home purchase mortgage and property taxes. Becoming familiar with the terms below will help you more easily understand your qualified tax benefits.
Understanding These Terms
"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 $1,000,000 aggregate loan amount limitation. However, a home equity loan can 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 $1,000,000 aggregate loan amount limitation.
Itemizing Tax Deductions for Real Property Owners
Deduction for mortgage interest (capped at $750,000 by the Tax Cuts and Jobs Act of 2017, down from $1 million in 2017) may be claimed using Schedule A of IRS Form 1040. (The interest deduction on home equity loans is suspended after 2017 through 2025.) However, with today’s low interest rates and higher standard deductions, many taxpayers are unable to take advantage of Schedule A deductions. The standard deduction is higher than the total itemization. When taxpayers can utilize itemized 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 filing paper returns, they must be attached to the IRS Form 1040. Some states offer similar deductions.
Deducting Real Estate Taxes in a Federal Return
Deductible real estate taxes include any state, local, or foreign taxes on real property levied for the general public welfare. To be deductible, the tax must be based on the assessed value of the property. Additionally, the levied taxes must be charged consistently across all property within the same jurisdiction. Real estate taxes may also be deductible on Schedule E for real property that is used for rental activities. Real estate taxes on commercial property are deductible using Schedule C for sole proprietors and forms 1120, 1120S, and 1065 for business entity filers.