Where to deduct real estate taxes.

Enter the amount of your deductible state and local real estate taxes on Schedule A (Form 1040), line 5b.

Real estate taxes paid at settlement or closing.

Real estate taxes are generally divided so that you and the seller each pay taxes for the part of the property tax year you owned the home. Your share of these taxes is deductible if you itemize your deductions.

Division of real estate taxes.

For federal income tax purposes, the seller is treated as paying the property taxes up to, but not including, the date of sale. You (the buyer) are treated as paying the taxes beginning with the date of sale. This applies regardless of the lien dates under local law. Generally, this information is included on the settlement statement you get at closing.

You and the seller each are considered to have paid your own share of the taxes, even if one or the other paid the entire amount. You each can deduct your own share, if you itemize deductions, for the year the property is sold.

You can deduct $244 on your return for the year if you itemize your deductions. You are considered to have paid this amount and can deduct it on your return even if, under the contract, you didn’t have to reimburse the seller.

Delinquent taxes.

Delinquent taxes are unpaid taxes that were imposed on the seller for an earlier tax year. If you agree to pay delinquent taxes when you buy your home, you can’t deduct them. You treat them as part of the cost of your home. See Real estate taxes, later, under Basis.

Escrow accounts.

Many monthly house payments include an amount placed in escrow (put in the care of a third party) for real estate taxes. You may not be able to deduct the total you pay into the escrow account. You can deduct only the real estate taxes that the lender actually paid from escrow to the taxing authority. Your real estate tax bill will show this amount.

Refund or rebate of real estate taxes.

If you receive a refund or rebate of real estate taxes this year for amounts you paid this year, you must reduce your real estate tax deduction by the amount refunded to you. If the refund or rebate was for real estate taxes paid for a prior year, you may have to include some or all of the refund in your income. For more information, see Recoveries in Pub. 525.

Charges for services.

An itemized charge for services to specific property or people isn’t a tax, even if the charge is paid to the taxing authority. You can’t deduct the charge as a real estate tax if it is:

.You must look at your real estate tax bill to decide if any nondeductible itemized charges, such as those listed above, are included in the bill. If your taxing authority (or lender) doesn’t furnish you a copy of your real estate tax bill, ask for it. Contact the taxing authority if you need additional information about a specific charge on your real estate tax bill..

Assessments for local benefits.

You can’t deduct amounts you pay for local benefits that tend to increase the value of your property. Local benefits include the construction of streets, sidewalks, or water and sewer systems. You must add these amounts to the basis of your property.

You can, however, deduct assessments (or taxes) for local benefits if they are for maintenance, repair, or interest charges related to those benefits. An example is a charge to repair an existing sidewalk and any interest included in that charge.

If only a part of the assessment is for maintenance, repair, or interest charges, you must be able to show the amount of that part to claim the deduction. If you can’t show what part of the assessment is for maintenance, repair, or interest charges, you can’t deduct any of it.

An assessment for a local benefit may be listed as an item in your real estate tax bill. If so, use the rules in this section to find how much of it, if any, you can deduct.

Transfer taxes (or stamp taxes).

You can't deduct transfer taxes and similar taxes and charges on the sale of a personal home. If you are the buyer and you pay them, include them in the cost basis of the property. If you are the seller and you pay them, they are expenses of the sale and reduce the amount realized on the sale.

Homeowners’ association assessments.

You can't deduct these assessments because the homeowners’ association, rather than a state or local government, imposes them.

Foreign taxes you paid on real estate.

You can't deduct foreign taxes you paid on real estate.

Tenant-stockholders.

A tenant-stockholder can be any entity (such as a company or corporation, trust, estate, partnership, or association) as well as an individual. The tenant-stockholder doesn't have to live in any of the cooperative's dwelling units. The units that the tenant-stockholder has the right to occupy can be rented to others.

Deductible taxes.

You figure your share of real estate taxes in the following way.

Generally, the corporation will tell you your share of its real estate tax. This is the amount you can deduct if it reasonably reflects the cost of real estate taxes for your dwelling unit.

Refund of real estate taxes.

If the corporation receives a refund of real estate taxes it paid in an earlier year, it must reduce the amount of real estate taxes paid this year when it allocates the tax expense to you. Your deduction for real estate taxes the corporation paid this year is reduced by your share of the refund the corporation received.

Prepaid interest.

If you pay interest in advance for a period that goes beyond the end of the tax year, you must spread this interest over the tax years to which it applies. Generally, you can deduct in each year only the interest that qualifies as home mortgage interest for that year. An exception (discussed later) applies to points.

Late payment charge on mortgage payment.

You can deduct as home mortgage interest a late payment charge if it wasn't for a specific service in connection with your mortgage loan.

Mortgage prepayment penalty.

If you pay off your home mortgage early, you may have to pay a penalty. You can deduct that penalty as home mortgage interest, provided the penalty isn't for a specific service performed or cost incurred in connection with your mortgage loan.

Ground rent.

In some states (such as Maryland), you may buy your home subject to a ground rent. A ground rent is an obligation you assume to pay a fixed amount per year on the property. Under this arrangement, you are leasing (rather than buying) the land on which your home is located.

Redeemable ground rents.

If you make annual or periodic rental payments on a redeemable ground rent, you can deduct the payments as mortgage interest. The ground rent is a redeemable ground rent only if all of the following are true.

Payments made to end the lease and buy the lessor's entire interest in the land aren't redeemable ground rents. You can't deduct them.

Nonredeemable ground rents.

Payments on a nonredeemable ground rent aren't mortgage interest. You can deduct them as rent only if they are a business expense or if they are for rental property.

Cooperative apartment.

You can usually treat the interest on a loan you took out to buy stock in a cooperative housing corporation as home mortgage interest if you own a cooperative apartment, and the cooperative housing corporation meets the conditions described earlier under Special Rules for Cooperatives. In addition, you can treat as home mortgage interest your share of the corporation's deductible mortgage interest. Figure your share of mortgage interest the same way that is shown for figuring your share of real estate taxes in the Example under Division of real estate taxes, earlier. For more information on cooperatives, see Special Rule for Tenant-Stockholders in Cooperative Housing Corporations in Pub. 936.

Refund of cooperative's mortgage interest.

You must reduce your mortgage interest deduction by your share of any cash portion of a patronage dividend that the cooperative receives. The patronage dividend is a partial refund to the cooperative housing corporation of mortgage interest it paid in a prior year.

If you receive a Form 1098 from the cooperative housing corporation, the form should show only the amount you can deduct.

SBA disaster home loans.

Interest paid on disaster home loans from the Small Business Administration (SBA) is deductible as mortgage interest if the requirements discussed earlier under Home Mortgage Interest are met.

General rule.

You can't deduct the full amount of points in the year paid. They are prepaid interest, so you must generally deduct them over the life (term) of the mortgage.

Exception.

You can deduct the full amount of points in the year paid if you meet all the following tests.

Home improvement loan.

You can also fully deduct in the year paid points paid on a loan to substantially improve your main home if you meet the first six tests listed earlier.

Refinanced loan.

If you use part of the refinanced mortgage proceeds to substantially improve your main home and you meet the first six tests listed earlier, you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds. You can deduct the rest of the points over the life of the loan.

Points not fully deductible in year paid.

If you don’t qualify under the exception to deduct the full amount of points in the year paid (or choose not to do so), see Points in Pub. 936 for the rules on when and how much you can deduct.

Figure A.

You can use Figure A as a quick guide to see whether your points are fully deductible in the year paid.

Figure A. Are my points fully deductible this year?

Figure A. Are My Points Fully Deductible This Year?

Figure A. Are My Points Fully Deductible This Year?

Summary: This flowchart is used to determine if mortgage points are fully deductible for the current tax year.

Start

This is the starting of the flowchart.

Decision (1)

Is the loan secured by your main home?

IF Yes Continue To Decision (2)

IF No Continue To Process (a)

Decision (2)

Is the payment of points an established business practice in your area?

IF Yes Continue To Decision (3)

IF No Continue To Process (a)

Decision (3)

Were the points paid more than the amount generally charged in your area?

IF Yes Continue To Process (a)

IF No Continue To Decision (4)

Decision (4)

Do you use the cash method of accounting?

IF Yes Continue To Decision (5)

IF No Continue To Process (a)

Decision (5)

Were the points paid in place of amounts that ordinarily are separately stated on the settlement sheet?

IF Yes Continue To Process (a)

IF No Continue To Decision (6)

Decision (6)

Were the funds you provided (other than those you borrowed from your lender or mortgage broker), plus any points the seller paid, at least as much as the points charged?

Footnote: The funds you provided aren't required to have been applied to the points. They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose.

IF Yes Continue To Decision (7)

IF No Continue To Process (a)

Decision (7)

Did you take out the loan to improve your main home?

IF Yes Continue To Process (b)

IF No Continue To Decision (8)

Decision (8)

Did you take out the loan to buy or build your main home?

IF Yes Continue To Decision (9)

IF No Continue To Process (a)

Decision (9)

Were the points computed as a percentage of the principal amount of the mortgage?

IF Yes Continue To Decision (10)

IF No Continue To Process (a)

Decision (10)

Is the amount paid clearly shown as points on the settlement statement?

IF Yes Continue To Process (b)

IF No Continue To Process (a)

Process (a)

You can't fully deduct the points this year. See the discussion on Points.

Continue To End

Process (b)

You can fully deduct the points this year on Schedule A (Form 1040).

Continue To End

End

This is the ending of the flowchart.

Please click here for the text description of the image.

Amounts charged for services.

Amounts charged by the lender for specific services connected to the loan aren't interest. Examples of these charges are:

Points paid by the seller.

The term “points” includes loan placement fees that the seller pays to the lender to arrange financing for the buyer.

Treatment by seller.

The seller can't deduct these fees as interest. However, they are a selling expense that reduces the seller's amount realized. See Pub. 523 for more information.

Treatment by buyer.

The buyer treats seller-paid points as if the buyer had paid them. If all the tests listed earlier under Exception are met, the buyer can deduct the points in the year paid. If any of those tests aren't met, the buyer must deduct the points over the life of the loan.

The buyer must also reduce the basis of the home by the amount of the seller-paid points. For more information about the basis of your home, see Basis, later.

Funds provided are less than points.

If you meet all the tests listed earlier under Exception except that the funds you provided were less than the points charged to you (test 6), you can deduct the points in the year paid up to the amount of funds you provided. In addition, you can deduct any points paid by the seller.

Excess points.

If you meet all the tests under Exception, earlier, except that the points paid were more than are generally charged in your area (test 3), you can deduct in the year paid only the points that are generally charged. You must spread any additional points over the life of the mortgage.

Mortgage ending early.

If you spread your deduction for points over the life of the mortgage, you can deduct any remaining balance in the year the mortgage ends. A mortgage may end early due to a prepayment, refinancing, foreclosure, or similar event.

Exception.

If you refinance the mortgage with the same lender, you can't deduct any remaining points for the year. Instead, deduct them over the term of the new loan.

Form 1098.

The mortgage interest statement you receive should show not only the total interest paid during the year, but also your deductible points paid during the year. See Mortgage Interest Statement, later.

Refund of overpaid interest.

If you receive a refund of mortgage interest you overpaid in a prior year, you will generally receive a Form 1098 showing the refund in box 4. Generally, you must include the refund in income in the year you receive it. See Refund of home mortgage interest, earlier, under Home Mortgage Interest.

More than one borrower.

If you and at least one other person (other than your spouse if you file a joint return) were liable for and paid interest on a mortgage that was for your home, and the other person received a Form 1098 showing the interest that was paid during the year, attach a statement to your paper return explaining this. Show how much of the interest each of you paid, and give the name and address of the person who received the form. Deduct your share of the interest on Schedule A (Form 1040), line 8b, and enter “See attached” to the right of that line.

Home acquisition debt limit.

The total amount you can treat as home acquisition debt at any time on your home cannot be more than $1 million ($500,000 if married filing separately). However, for tax years beginning after December 31, 2017, and before January 1, 2026, there is a further limitation. If you purchased your home during this time, the total amount you can treat as home acquisition debt at any time on your home generally cannot be more than $750,000 ($375,000 if married filing separately).

Discharges of qualified principal residence indebtedness.

You can exclude from gross income any discharges of qualified principal residence indebtedness made after 2006 and in most cases before 2026. You must reduce the basis of your principal residence (but not below zero) by the amount you exclude.

Principal residence.

Your principal residence is the home where you ordinarily live most of the time. You can have only one principal residence at any one time.

Qualified principal residence indebtedness.

This indebtedness is a mortgage that you took out to buy, build, or substantially improve your principal residence and that is secured by that residence. If the amount of your original mortgage is more than the cost of your principal residence plus the cost of substantial improvements, qualified principal residence indebtedness can’t be more than the cost of your principal residence plus improvements.

Any debt secured by your principal residence that you use to refinance qualified principal residence indebtedness is qualified principal residence indebtedness up to the amount of your old mortgage principal just before the refinancing. Additional debt incurred to substantially improve your principal residence is also qualified principal residence indebtedness.

Amount you can exclude.

You can only exclude debt discharged after 2006 and in most cases before 2026. The most you can exclude is $750,000 ($375,000 if married filing separately). You can’t exclude any amount that was discharged because of services performed for the lender or on account of any other factor not directly related either to a decline in the value of your residence or to your financial condition.

Ordering rule.

If only a part of a loan is qualified principal residence indebtedness, you can exclude only the amount of the discharge that is more than the amount of the loan (immediately before the discharge) that is not qualified principal residence indebtedness.

Main home.

You can have only one main home at any one time. This is the home where you ordinarily live most of the time.

Second home and other special situations.

If you have a second home, use part of your home for other than residential living (such as a home office), rent out part of your home, or are having your home constructed, see Qualified Home in Pub. 936.

Limit based on credit rate.

If the certificate credit rate is higher than 20%, the credit you are allowed can't be more than $2,000.

Limit based on tax.

After applying the limit based on the credit rate, your credit generally can't be more than your tax liability. See the Credit Limit Worksheet in the Form 8396 instructions to figure the limit based on tax.

Credit rate more than 20%.

If you are subject to the $2,000 limit because your certificate credit rate is more than 20%, you can't carry forward any amount more than $2,000 (or your share of the $2,000 if you must divide the credit).

Year of refinancing.

In the year of refinancing, add the applicable amount of interest paid on the old mortgage and the applicable amount of interest paid on the new mortgage, and enter the total on Form 8396, line 1.

If your new MCC has a credit rate different from the rate on the old MCC, you must attach a statement to Form 8396. The statement must show the calculation for lines 1, 2, and 3 for the part of the year when the old MCC was in effect. It must show a separate calculation for the part of the year when the new MCC was in effect. Combine the amounts from both calculations for line 3, enter the total on line 3 of the form, and enter “See attached” on the dotted line next to line 2.

New MCC can't increase your credit.

The credit that you claim with your new MCC can't be more than the credit that you could have claimed with your old MCC.

In most cases, the agency that issues your new MCC will make sure that it doesn't increase your credit. However, if either your old loan or your new loan has a variable (adjustable) interest rate, you will need to check this yourself. In that case, you will need to know the amount of the credit you could have claimed using the old MCC.

There are two methods for figuring the credit you could have claimed. Under one method, you figure the actual credit that would have been allowed. This means you use the credit rate on the old MCC and the interest you would have paid on the old loan.

If your old loan was a variable rate mortgage, you can use another method to determine the credit that you could have claimed. Under this method, you figure the credit using a payment schedule of a hypothetical self-amortizing mortgage with level payments projected to the final maturity date of the old mortgage. The interest rate of the hypothetical mortgage is the annual percentage rate (APR) of the new mortgage for purposes of the Federal Truth in Lending Act. The principal of the hypothetical mortgage is the remaining outstanding balance of the certified mortgage indebtedness shown on the old MCC.

.You must choose one method and use it consistently beginning with the first tax year for which you claim the credit based on the new MCC. .

.As part of your tax records, you should keep your old MCC and the schedule of payments for your old mortgage..

Purchase.

The basis of a home you bought is the amount you paid for it. This usually includes your down payment and any debt you assumed. The basis of a cooperative apartment is the amount you paid for your shares in the corporation that owns or controls the property. This amount includes any purchase commissions or other costs of acquiring the shares.

Construction.

If you contracted to have your home built on land that you own, your basis in the home is your basis in the land plus the amount you paid to have the home built. This includes the cost of labor and materials, the amount you paid the contractor, any architect's fees, building permit charges, utility meter and connection charges, and legal fees that are directly connected with building your home. If you built all or part of your home yourself, your basis is the total amount it cost you to build it. You can't include in basis the value of your own labor or any other labor for which you didn't pay.

Real estate taxes.

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. See Real estate taxes paid at settlement or closing under State and Local Real Estate Taxes, earlier, to figure the real estate taxes you paid or are considered to have paid.

If you pay any part of the seller's share of the real estate taxes (the taxes up to the date of sale), and the seller didn't reimburse you, add those taxes to your basis in the home. You can't deduct them as taxes paid.

If the seller paid any of your share of the real estate taxes (the taxes beginning with the date of sale), you can still deduct those taxes. Don’t include those taxes in your basis. If you didn't reimburse the seller, you must reduce your basis by the amount of those taxes.

Settlement or closing costs.

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 and certain real estate taxes. You deduct them in the year you buy your home if you itemize your deductions. You can add certain other settlement or closing costs to the basis of your home.

Items added to basis.

You can include in your basis the settlement fees and closing costs you paid 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.

The following are some of the settlement fees and closing costs that you can include in the original basis of your home.

If the seller actually paid for any item for which you are liable and for which you can take a deduction (such as your share of the real estate taxes for the year of sale), you must reduce your basis by that amount unless you are charged for it in the settlement.

Items not added to basis and not deductible.

Here are some settlement and closing costs that you can't deduct or add to your basis.

Points paid by seller.

If you bought your home after April 3, 1994, you must reduce your basis by any points paid for your mortgage by the person who sold you your home.

If you bought your home after 1990 but before April 4, 1994, you must reduce your basis by seller-paid points only if you deducted them. See Points, earlier, for the rules on deducting points.

Fair market value.

Fair market value (FMV) is the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and who both have a reasonable knowledge of all the necessary facts.

Donor's adjusted basis is more than FMV.

If someone gave you your home and the donor's adjusted basis, when it was given to you, was more than the FMV, your basis at the time of receipt is the same as the donor's adjusted basis.

Disposition basis.

If the donor's adjusted basis at the time of the gift is more than the FMV, your basis (plus or minus any required adjustments; see Adjusted Basis, later) when you dispose of the property will depend on whether you have a gain or a loss.

Donor's adjusted basis equal to or less than the FMV.

If someone gave you your home after 1976 and the donor's adjusted basis, when it was given to you, was equal to or less than the FMV, your basis at the time of receipt is the same as the donor's adjusted basis, plus the part of any federal gift tax paid that is due to the net increase in value of the home.

Part of federal gift tax due to net increase in value.

Figure the part of the federal gift tax paid that is due to the net increase in value of the home by multiplying the total federal gift tax paid by a fraction. The numerator (top part) of the fraction is the net increase in the value of the home, and the denominator (bottom part) is the value of the home for gift tax purposes after reduction for any annual exclusion and marital or charitable deduction that applies to the gift. The net increase in the value of the home is its FMV minus the adjusted basis of the donor.