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March 22nd, 2011

Will your home or mortgage hurt you at tax time?



Most of us know that a portion of the interest paid on a mortgage is tax deductable — it’s one of this country’s shining examples of pro-homeownership policies.

Treasury Dollar BillBut can or should every homeowner deduct their mortgage interest at tax time?

What if you sold your home last year, how does that sale affect your 2010 taxes?

How does a loan modification, foreclosure or refinance impact your upcoming tax bill?

HSH.com has put together an article that answers 10 common questions as they relate to homeowners during tax season. Time is running out to file your taxes, so be sure you’re aware of how your home and mortgage factor into what you owe by April 18.

Let’s take a look at some common 2010 tax questions and answers:

1. How much of my mortgage payment is tax deductible?

On a Schedule A, you can deduct the following:

  • Interest on debt used to buy, build or improve your primary or second home (called acquisition debt), as long as mortgages totaled $1 million or less ($500,000 if single or married filing separately).
  • Mortgage insurance (or funding fees for government loans) for loans taken after 2006 as long as your adjusted gross income does not exceed $109,000 for a married couple (half that for singles and those married filing separately).
  • Property taxes on first and second homes. Starting in 2010, however, you must itemize your deductions to get this tax break.  

2. I sold my home this year. Will I owe capital gains tax?

As long as the property was your principal residence for at least two of the last five years, you can exclude $250,000 of your profit ($500,000 for married couples) from your taxable income. If you profited less than the $250,000/$500,000 threshold, no extra form is required. You can do this as often as every two years.

For those with profits that cannot be excluded, you’ll report your gain on a Schedule D, Capital Gains and Losses. There are special rules for vacation homes. You may be able to exclude some or all of your gain.

4. I bought or refinanced a home this year. Are my closing costs tax deductible?

You can claim a deduction for real estate taxes you paid as part of your mortgage closing costs. The same goes for prepaid interest. It will be included on the 1098 form your lender sends you. What about points? The IRS has a flowchart that you can use to see when points are and are not deductible. In general, you must have paid points to build, buy or improve your primary residence in order to deduct the entire amount in the year they were paid. Otherwise they may still be deducted but on a prorated basis.

6. Does a mortgage modification affect my taxes?

If you modify your mortgage, one consequence might be that you pay so much less interest that you will save more by choosing the standard deduction rather than itemizing. Don’t just assume that itemizing is always best because you did it in the past.

7. Does a mortgage foreclosure affect my taxes?

The Mortgage Forgiveness Debt Relief Act of 2007 generally allows you to exclude income from the discharge of debt on your primary residence. However, this law does not cover investment properties and vacation homes, nor does it apply to forgiven home equity loans. You could end up paying income tax on this canceled debt. In addition, states’ rules for the treatment of forgiven mortgage debt vary, so check with a tax professional.

Be sure to read all “10 critical questions for homeowners at tax time.” (This article was written by HSH.com’s Gina Pogol.)

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2 Responses to “Will your home or mortgage hurt you at tax time?”

  1. Renee Says: November 30th, 2012 at 10:23 am

    If someone owes the IRS a significant amount of money, will they be able to qualify for a loan modification? If not, what if they consider an Offer in Compromise will that help them in their loan modification approval?

  2. Tim Manni Says: December 7th, 2012 at 11:55 am

    Hey Renee,

    We have not seen anything anywhere that suggests that an IRS issue will prevent a loan modification (at least not in HAMP). I suspect that the IRS would be advised of this material change in the debtor’s debt structure and would be likely to help themselves to a larger portion of the (now larger) available income to satisfy the debt, leaving less benefit of the mod to the borrower.

    There were some changes in 2012 but nothing about loan mods is mentioned: http://www.irs.gov/uac/IRS-Announces-More-Flexible-Offer-in-Compromise-Terms-to-Help-a-Greater-Number-of-Struggling-Taxpayers-Make-a-Fresh-Start

    Just our guess, hope that helps,


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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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