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4 Real Estate Tax Deductions You Don't Want to Overlook

Yep! It's tax season! If you’re a homeowner, you can claim some sizable deductions that can help reduce the amount you’ll owe Uncle Sam in April.

Mortgage interest, property taxes and mortgage insurance premiums are just some of the deductions you can take if you have a mortgage on your home. These deductions might seem small individually, but together they can add up to thousands of dollars in savings on your tax bill.

To help you get the most out of your real-estate-related tax deductions, we spoke with tax expert Andrew Poulos, principal of Poulos Accounting and Consulting in Atlanta. Here, he explains what you can—and can’t—count as a real estate deduction on your taxes.

Note that you can either itemize deductions or take the IRS standard deduction—not both.

“Itemized deductions are only going to benefit you if you have enough things to itemize on your taxes versus taking a standard deduction,” Poulos says. The standard deduction is $12,600 for married couples and $6,300 for singles or married couples filing separately. “If your itemized items don’t exceed those amounts,” Poulos says, “it’s pointless to do them, because you’ll shortchange yourself.”

Here are the real estate tax deductions you don’t want to miss out on.

1. Mortgage Interest

Home mortgages are structured so that a huge chunk of each payment you make in the initial years of owning your home goes toward paying down the interest on your loan and only a little goes toward the principal. The good news is, though, that you can deduct those interest payments on your primary (and sometimes a second) residence—up to $1 million (or $500,000 if you’re married and filing separately).

Most homeowners count this as one of the largest deductions on their tax bill each year. It applies to home purchases or newly refinanced mortgages, home equity lines of credit and home equity loans, sometimes called second mortgages. The deductible interest on home equity debt—regardless of how you used the money you pulled out—applies to loans of $100,000 or less throughout the year (or $50,000 if you are married and filing separately).

This deduction, filed with IRS Form 1098, can add up to thousands of dollars for most homeowners. The benefit: It reduces your taxable income so you don’t owe as much come tax time.

The key to taking advantage of the mortgage interest deduction is itemizing your deductions in meticulous detail, Poulos says. Your lender will send you a statement each year to let you know how much interest you paid so you can figure out if it’s worth your while to itemize.

2. Points

If you bought a home in 2015, there’s another deduction (score!) you get to include on your tax bill: mortgage points. Most borrowers pay for points, which come in two forms: discount points, which allow you to prepay some of your loan interest in exchange for a better mortgage rate, and the loan origination fee. One point is equal to 1% of your loan amount. Many homeowners completely overlook this deduction, Poulos says.

Let’s say you bought a home in New York for $500,000 with a 1 percent origination fee. That’s $5,000 you can itemize as a deduction on your tax bill, and you want to get credit for each and every dollar you spent.

Your lender should provide you with a copy of your settlement statement, with the loan origination fee and discount points listed on it, in January. If you don’t receive a copy, ask for one and verify that this information is listed on it so you can take advantage of the deduction on Form 1098, Poulos says.

3. Property Taxes

Another perk of homeownership is writing off your annual property taxes. You get to deduct these taxes in the year they’re paid, not the year they were due, Poulos says.

Your county’s property assessor’s office typically sends out a statement at the beginning of the year showing the amount of your property taxes. One more thing to keep in mind: If you bought a home and reimbursed the sellers for taxes they had already paid for the year, you’ll see that reflected on your settlement statement, not on your 1098.

4. Mortgage Insurance Premium

If your down payment was less than 20 percent when you purchased your home, you’re likely paying a mortgage insurance premium. Through the end of 2016, the mortgage insurance premium deduction includes policies provided by the Department of Veterans Affairs, the Federal Housing Administration and the Rural Housing Service, as well as private mortgage insurance from conventional lenders, issued after 2006.

The IRS treats your mortgage insurance premium payment as mortgage interest that you can deduct on Schedule A of Form 1040. Although the overall amount of your premium can be counted as an interest deduction, it phases out for high-income earners, Poulos says. For instance, you can’t deduct your mortgage insurance premium if you earn an adjusted gross income of more than $109,000 (or more than $54,500 for married couples filing separately).Items You Can’t Deduct (Sorry)Sure, you get some pretty sweet deductions as a member of the homeowners club, but there are some exceptions.

  • Here are a few real-estate-related costs you can’t deduct:

  • Home and title insurance coverage (other than mortgage insurance premiums)

  • Depreciation

  • Utilities, such as gas, electricity and waterMost settlement costs (other than points)

  • Forfeited deposits, down payments or earnest moneyHome improvements paid via a private loan, cash or credit cardHomeowners association fees

  • Transfer taxes (stamp taxes) in a personal home sale

Here’s an IRS list of special situations and other nondeductible items related to homeownership.

Bottom Line

One of the major benefits of owning your home has always been the tax write-offs that come with the package. Keep in mind, though, that if your itemized deductions don’t add up to as much as the standard deduction you’re eligible for, the standard deduction would be the better way to go.

If you have a complicated tax situation or you’re unsure about certain real-estate-related deductions, it’s a good idea to consult with a licensed tax professional for guidance. You don’t want to miss out on deductions that will lower your tax burden and keep more money in your pocket.

Homeownership can have some pain points along the way, but the tax benefits you reap help make the largest investment of your life pay off in the long run.

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