Mortgage Interest and Other FAQ Tax Questions

It’s getting near tax season and one of the advantages of owning a home is the tax deductions you may be eligible to take. In general, mortgage interest and property taxes are deductible expenses on your primary residence. But what other real estate-related exemptions may you be eligible for? Check out these Frequently Asked Questions from the IRS website.

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

Answer: 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.

1. Real estate taxes paid on your primary and second residence are, generally, deductible.
2. Deductible real estate taxes include any state, local, or foreign taxes on real property levied for the general public welfare.
3. Deductible real estate taxes do not include taxes charged for local benefits and improvements that increase the value of the property.

Question: Is the loss on the sale of your home deductible?

Answer: The loss on the sale of a personal residence is a nondeductible personal loss.

Question: I sold my principal residence this year. What form do I need to file?

Answer: For home sales after May 6, 1997, you will generally only need to report the sale of your home if you realized a gain on the sale and either you did not own and use the home as your principal residence for a total of at least two years during the five year period that ended on the date of the sale or you realized a gain of more than $250,000 ($500,000 for certain joint returns). To determine the amount of gain that can be excluded from income refer to Publication 523, Selling Your Home.

You may be entitled to exclude the gain realized on sale of your principal residence from income if during the 5-year period ending on the date of the sale:

1. You owned the home for a total of at least 2 years; the 2 year period need not be continuous (the ownership test).
2. You must have lived in the home as your main home for a total of at least 2 years; the 2 year period need not be continuous (the use test).
3. During the 2-year period ending on the date of sale, you did not exclude gain from the sale of another home.

If you owned and lived in the property as your main home for less than 2 years, you may still be able to claim a reduced exclusion in some cases. See Publication 523, Selling Your Home for more information.

NOTE: If you were on qualified extended duty in the U.S. Armed Services, Foreign Service, or the intelligence community (sales or exchanges after December 20, 2006) you may suspend the five-year test period for up to 10 years. You may use this provision for only one property at a time. You are on qualified extended duty when you are assigned to a duty station at least 50 miles from your former principal residence or are residing in government housing under orders and the duty lasts for more than 90 days or for an indefinite period.

Question: If I must deduct points over the life of my mortgage, and I have a 30 year mortgage, does this mean that I divide the points paid by 30 and enter that amount on Schedule A?

Answer: No, you don’t divide the points by 30. If you choose to use the straight-line method, you need to divide the points by the number of payments over the term of the loan and deduct points for a year according to the number of payments made in the year.

If the loan ends prematurely, due to payoff or refinance with a different lender, for example, then the remaining points are deducted in that year.
Points not included in Form 1098 (usually not included on a refinance) should be entered on Form 1040 Schedule A, Itemized Deductions.

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