Homeowner Tax Tips

Deducting Mortgage Interest

Mortgage interest on a home is usually fully tax-deductible. You can deduct interest on multiple mortgages, as long as they do not exceed $1 million. The purpose of the mortgage must specifically be to buy, build or improve a home.

Your lender should send you a “Form 1098” that details how much mortgage interest you paid for the year. To claim this deduction, you should fill out Schedule A, labeled “itemized deductions,” and record your interest deduction.

Late payment charges also may be deducted as home mortgage interest, if it is not for a specific service received in connection with your home loan. The same is true for mortgage prepayment penalties—if you pay off your mortgage early and incur a prepayment penalty, you can deduct that penalty as home mortgage interest (subject to the same requirements for late payments).

Deducting Real Estate Taxes

Real estate taxes, which are annual taxes based on the assessed value of a property, also are tax-deductible. Your interest statement may list the amount of real estate taxes you paid if your taxes and homeowners' insurance were placed in an escrow account when you closed on your mortgage. If your real estate taxes aren't included on the statement, you could review your cancelled checks to find your total real estate tax amount

Deducting Loan Points Paid on a Purchase

The points you pay on a purchase mortgage are deductible the year you made the purchase. You can deduct any points you paid — and that a seller paid on your behalf* — if you meet the following criteria:

• The loan is secured by your primary residence and the loan was used to buy, improve or build the home;

• Paying points (and the amount of points paid) is not an irregular practice in the seller's geographic area;

• The points are computed as a percentage of the loan principal;

• The points are clearly delineated on the buyer's settlement statement; and

• You put cash into your home purchase in an amount at least equal to the points you were charged.

*Seller-Paid Points are Deductible by the Buyer

When a seller pays points for the buyer (or, in other words, buys the mortgage rate down) the buyer gets a lower mortgage rate. The cost of those points is deductible for the buyer.

Deducting Loan Points Paid on a Refinance

If you refinanced last year, you may be able to write-off any points you paid to buy down the mortgage rate. To do this, you deduct the points proportionately over the life of the new loan. For example, if you took out a 30-year loan, you would deduct 1/30th of the points you paid each year.

Have You Refinanced More Than Once in Recent Years?

Many homeowners have overlooked an important opportunity. If you have refinanced more than once, you can deduct unclaimed points from an earlier refinance. Say, for example, you refinanced in 2003 and paid points. You deducted 1/30th of those points in 2003 and 2004. However, rates continued to drop, so you refinanced again in 2005, paying off that 2003 loan. The remaining points you have not yet deducted can now be deducted in full in 2005. This same deduction is available to you if you sold the house in 2005, rather than refinancing.

Deducting Interest on a Home Equity Loan

The interest on a home equity loan may be tax-deductible up to $100,000. However, if the combined amount of your home equity loan and your first mortgage totals more than the property's actual value, that deduction may be limited. Usually, you can deduct the smaller of the interest on a $100,000 loan or your home's value less the amount of your first mortgage.

As always, you should check with your tax advisor to determine which of these deductions apply to you!

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