San Francisco Chronicle – Congress has bestowed a wealth of tax breaks on homeowners, but in a way that resembles the Winchester Mystery House.
Whether you are a first-time or longtime homeowner, figuring out what you can and cannot deduct can be perplexing, especially because the laws change from year to year.
Here is a brief guide to homeowner taxes for 2010 returns. For a more complete picture, get your hands on IRS Publication 530 at sfg.ly/dW1G9H.
Deductible: For most homeowners, these expenses are deductible on Schedule A, itemized deductions.
– Mortgage interest. You can deduct the interest paid on up to $1 million in mortgage debt on your primary home and one additional residence. This includes home-equity debt that was used to substantially improve your home. Remember the $1 million limit ($500,000 if married filing separately) applies to your debt, not the interest on that debt.
– Home-equity debt. For regular income tax, you can also deduct interest on up to $100,000 in home-equity debt, no matter how it was used. But you can not deduct interest on more than $100,000 in home-equity debt that was not used to improve the home.
Suppose you have a $500,000 mortgage and take out a $250,000 home-equity loan. You use $100,000 of the home-equity loan to add a master suite and the other $150,000 to buy a car and pay off credit cards.
Interest on the $100,000 that went into the master suite is deductible because, when added to your $500,000 mortgage, it is still less than $1 million. Of the remaining $150,000, you can only deduct interest on $100,000.
If you are subject to alternative minimum tax, you can not deduct interest on home-equity debt that was not used to buy, build or improve a home.
For more on home mortgage interest, see IRS Publication 936.
– Points. When you buy or build your main home, you can deduct all of the points paid on your mortgage, as long they are labeled as points on the settlement and meet five other criteria found in Publications 936 or 530.
When you refinance a mortgage, you must deduct the points you paid gradually, over the life of the loan. When you pay off this loan, you can deduct any remaining points in that year. However, if you refinance with the same lender, you add points paid on the new loan to the remaining points on the old loan and deduct that amount over the life of the loan.
– Mortgage insurance. Through 2011, you can deduct mortgage insurance premiums, but only if the mortgage insurance contract was issued on or after Jan. 1, 2007.
– Property tax. Property taxes are generally deductible, unless you are subject to AMT, in which case you generally lose the deduction.
In 2008 and 2009 only, homeowners could deduct up to $500 in property taxes ($1,000 for joint filers) even if they did not itemize deductions, but this deduction is not available for 2010. Now they are only deductible on Schedule A, according to Mark Luscombe, principal federal tax analyst with CCH.
Not deductible: Most household expenses are not deductible, including homeowner association dues, homeowners insurance and utilities.
Except for points, most closing costs are not deductible, although some can be added to your cost basis.
Improvements to your home are not deductible, although you can usually add them to your cost basis.
Cost basis includes what you paid for the home, plus improvements, plus any untaxed profits rolled over from the sale of a home before May 7, 1997 (or in some cases Aug. 5, 1997). When you sell your home, you will subtract your cost basis from your sales proceeds to determine your capital gain. You will pay no tax on your first $250,000 in gains ($500,000 if married). Anything over that amount is subject to capital gains tax.
