Real Estate Taxes and Mortgage Interest

 I just bought a home. What can I deduct from the settlement statement? 

If you bought your home, you probably paid settlement or closing costs in addition to the contract price. These costs are divided between you and the seller according to the sales contract, local custom, or understanding of the parties. If you built your home, you probably paid these costs when you bought the land or settled on your mortgage. The only settlement or closing costs you can deduct are home mortgage interest, points that represent interest and certain real estate taxes. You, may, deduct them in the year you buy your home if you itemize your deductions. Real estate taxes are usually divided so that you and the seller each pay taxes for the part of the property tax year that each owned the home.

You add certain other settlement or closing costs to the basis of your home. You include in your basis the settlement fees and closing costs that are for buying your home. A fee is for buying the home if you would have had to pay it even if you paid cash for the home.

There are settlement or closing costs that you cannot deduct or add to the basis of your home. These include fees and costs that are for getting a mortgage loan. For more information refer to Publication 530 (PDF), Tax Information for First Time-Homeowners, and Publication 936 (PDF), Home Mortgage Interest Deduction 

Is interest on a home equity line of credit deductible as a second mortgage? 

You may deduct Home Equity Debt Interest, as an itemized deduction, if you are legally liable to pay the interest, pay the interest in the tax year, secure the debt with your home, and do not exceed your Home Equity Debt Limit. For more information, refer to Publication 936 (PDF), Home Mortgage Interest; and Tax Topic 505, Interest Expense. 

I refinanced my home last year and paid points. Are they all deductible this year? 

Points paid to refinance your home are not, deductible in their entirety in the year paid. They are "amortized" or deducted over the life of the loan. For more information, refer to Publication 936 (PDF), Home Mortgage Interest Deduction, and Tax Topic 504, Home Mortgage Points.

We purchased land to build a home on. Is the interest on the mortgage secured by the land deductible? 

Interest on the mortgage secured by bare land is not, generally, deductible as mortgage interest. In order for interest to be deductible as home mortgage interest, the loan must be secured by a qualified residence. A qualified residence is your principal residence or one other residence selected by you that you use as a residence. Once you start construction of your home, you may treat the home under construction as a qualified residence for a period of up to 24 months, but only if the home becomes a qualified residence at the time it is ready for occupancy. For more information, refer to Publication 936 (PDF), Home Mortgage Interest Deduction; and Tax Topic 505, Interest Expense. 

Is interest paid on a construction loan for a new home considered deductible mortgage interest? 

You can treat a home under construction as a home qualifying for the home interest deduction for a period of up to 24 months, but only if it becomes your qualified home at the time it is ready for occupancy. For more information, refer to Publication 936 (PDF), Home Mortgage Interest Deduction; and Tax Topic 505, Interest Expense. 

I took out a home equity loan to pay off personal debts. Is this interest deductible? Where do I enter this amount on my tax return? 

A loan taken out for reasons other than to buy, build, or substantially improve your home, such as to pay off personal debts may qualify as home equity debt. The interest would be deducted on line 10, Form 1040, Schedule A (PDF), Itemized Deductions. You may not deduct interest on any amount of home equity debt that exceeds your Home Equity Debt Limit. For more information, refer to Publication 936 (PDF), Home Mortgage Interest Deduction; and Tax Topic 505, Interest Expense.

May I deduct my home improvements and repairs to my home? 

Home improvements add to the value of your home, prolong its useful life, or adapt it to new uses. Home improvements costs are not deductible. However, you add the cost of improvements to the basis of your property. Examples of improvements include putting a recreation room in your unfinished basement, adding another bathroom, or bedroom, putting up a fence, putting in new plumbing or wiring, putting on a new roof, or paving your driveway.

For a list of some other examples of improvements, refer to Publication 523 (PDF), Selling Your Home. Repairs maintain your home in good condition. They are not currently deductible nor do they add to your home's value or prolong its life. You do not add their cost to the basis of your property.

Some examples of repairs include repainting your house inside or outside, fixing your gutters or floors, repairing leaks or plastering and replacing broken window panes.

Exception: The entire job is considered an improvement, however, if items that would otherwise be considered repairs are done as part of an extensive remodeling or restoration of your home. For more information, refer to Publication 523 (PDF); Selling Your Home; and Publication 551 (PDF), Basis of Assets. 

Is personal credit card interest tax deductible? 

No. Personal interest is not deductible. For more information, refer to Publication 17 (PDF), Your Federal Income Tax for Individuals; and Tax Topic 505, Interest Expense.

Is the mortgage interest and property tax on a second residence deductible?

The mortgage interest on a second home which you use as a residence for some portion of the taxable year is generally deductible if the interest satisfies the same requirements for deductibility as interest on a primary residence. Real estate taxes paid on your primary and second residence are, generally, deductible. Deductible real estate taxes include any state, local, or foreign taxes on real property levied for the general public welfare. Deductible real estate taxes do not include taxes charged for local benefits and improvements that increase the value of the property. For more information, refer to Publication 17 (PDF), Your Federal Income Tax for Individuals; Tax Topic 503, Deductible Taxes; and Publication 530 (PDF), Tax Information for First-Time Home Buyers.

I refinanced my home and paid closing costs. Are the loan origination fee, appraisal fee, document prep fee, closing fee, and title insurance or any of the other expenses deductible? Are any of the fees I paid to the bank for the loan deductible?

Deductible fees are limited to home mortgage interest and certain real estate taxes. Points that represent interest on a refinancing are amortized over the life of the loan.

Fees that are not associated with the acquisition of a loan may only have effect on the basis of the home. An example would be a transfer tax that would be charged regardless of whether a loan was involved.

Fees related to the acquisition of a loan are not deductible and are not basis adjustments. A credit report fee is a good example.