The Internal Revenue Service rewards homeowners with a wide array of tax deductions to decrease taxable income. Virtually all homeowners can deduct mortgage interest expense, interest on home improvement loans and real estate taxes. Homeowners that rent their property can also claim depreciation and rental expenses.
Mortgage and Financing Interest
Homeowners can deduct the interest they pay on mortgages and home improvement loans. Loan origination fees and discount points purchased to reduce loan interest rates are also tax deductible. Taxpayers can only deduct the interest for mortgages up to $1 million and the deduction is only permitted for first and second homes. Homeowners that make deductible interest payments will receive a Form 1098 each year from the lender detailing how much of their payments are deductible.
Property and Real Estate Taxes
The IRS also allows taxpayers to deduct state and local personal property taxes. That means any amounts paid to state and local governments for real estate tax are deductible. If you paid real estate taxes through an escrow account, this amount will also be listed on your annual Form 1098. If you paid taxes directly to the county, you probably won't get a tax form detailing your payment. Save the documentation you received in the mail or check your county tax assessor website to confirm the amount you paid.
Homeowners that rent their home have a whole separate set of tax deductions available to them, including depreciation expense. If you're a landlord and you want to claim depreciation expense, you first must determine your cost basis in the property. Cost basis is the lower of the original purchase price or the fair market value when the home became a rental. Then, allocate a portion of the cost basis to the home based on the value of land and property described on your county assessor tax notice. The amount allocated for the house is the amount you can depreciate for tax purposes.
Other Rental Expenses
Aside from depreciation expense, landlords can deduct other business costs they incur while renting property. These costs often include repairs and maintenance on the property, travel to the rental site, homeowner's insurance and property management company fees. Landlords can detail these expenses and figure net rental income for tax purposes on Schedule E of Form 1040.
Based in San Diego, Calif., Madison Garcia is a writer specializing in business topics. Garcia received her Master of Science in accountancy from San Diego State University.