A quick note before we begin today’s topic: We’re not tax professionals here at the Stern Team, so please be sure to meet with a qualified CPA for more details. If you don’t know one, we’re happy to refer one whom we trust completely to you.

Every four years, some candidate for higher political office tries to focus our attention on equalizing the tax laws and repealing the homeowner benefits, but these arguments have consistently fallen on deaf ears. Thankfully, our own local political action committee has successfully fought off and worked diligently to ensure that our legislators don’t tack on the insidious transfer fee, which gets charged to the seller or buyer at closing.

For those of us who own homes, here’s a list of the itemized tax deductions available to the average homeowner. Every year, you’re permitted to deduct the following expenses:

1. Taxes. Real property taxes, both state and local, can be deducted. The one exception is that tax filers can deduct on Schedule A any combination of state and local property taxes, as well as income or sales taxes, but only up to a total of $10,000. Interestingly, married couples who file their own separate tax returns can only deduct up to $5,000. However, it should be noted that real estate taxes are only deductible in the year that they’re paid to the government. Thus, if in the year 2018, your lender held money in escrow for taxes due in 2019, you can’t take a deduction for these taxes when you file your 2018 tax return.

Mortgage lenders are required to send an annual statement to borrowers by the end of January each and every year that reflects the amount of mortgage interest in real estate taxes that the homeowners actually paid during the previous year.

2. Mortgage and interest. Interest on mortgage loans on a first or second home is fully deductible, subject to the following limitations:

Acquisition loans—up to $1,000,000

Home equity loans—up to $100,000

If you are married but file these separately, these limits are split in half. Note that for the new loans taken out after December 14, 2017, the limit on the deductible mortgage debt is reduced to $750,000. Loans in existence prior to that date are grandfathered in.

You must understand the concept of the acquisition loan: To qualify for such a loan, you must buy, construct, or substantially improve your home. If you refinance for more than the outstanding indebtedness, the excess amount does not qualify as an acquisition loan unless you use all of the excess to improve your home. However, any other excess may qualify as a home equity loan; if you pull out a home equity loan, you actually have to use that money to improve your house.

3. Points. Because mortgage rates are still considerably low, not too many borrowers right now are paying points. But with interest rates on the rise, this is something to attend to. When you obtain a mortgage loan in order to get a lower-rate mortgage, you would pay one or more points up front. Whether referred to as loan origination fees, premium charges, or discounts, they’re still points. Each point is essentially 1% of the amount that’s being borrowed. If you obtain a loan of $170,000, each point will cost you $1,700 and the interest rate on your loan will then be lowered. The IRS has also ruled that even if points are paid by sellers, they’re still deductible by the homebuyer. Points paid to the lender when you refinance your current mortgage are not fully deductible in the year that they’re paid; you have to allocate the amount over the entire life of the loan.

For example, if you paid 1,700 points for a 30-year loan, each year you’re permitted to deduct only $56.66. However, when you pay off this new loan, any remaining portion of the points that you have not deducted are then deductible in full.

“It should be noted that real estate taxes are only deductible in the year that they’re paid to the government.”

Needless to say, if you have any questions about these tax benefits, discuss them with your financial and legal advisors. We hope that this topic has been useful for you, and if you have any real estate questions, don’t hesitate to reach out to us. We are happy to help you.