Can property taxes be deducted?

Property taxes on all real estate, including those levied by state and local governments and school districts, are fully deductible against current income taxes.

Mortgage interest and property taxes are deductible on a second home if you itemize. Check with your accountant or tax adviser for specifics.

How are property taxes configured?

Counties and municipalities arrive at a tax rate each year as part of their budgetary process. Upon determining the amount of their budget for the upcoming fiscal year that will have to be funded through ad valorem property tax revenues, a tax rate is established at a sufficient level to raise the required revenue. The tax rate is derived by dividing the revenue that is needed from the ad valoreum* property tax source by the total assessed value of property in the taxing unit (county or city.) The tax rate must be established no later than the first day of the new fiscal year (July 1).

*Ad valoreum is defined as a tax levied on property according to its value.


How does home mortgage tax deductions work?

The mortgage interest deduction entitles you to completely deduct the interest on your home loan for the year in which you paid it. Mortgage interest is not a dollar-for-dollar tax cut; it reduces taxable income. You must itemize deductions in order to do this, which means your total deductions must exceed the IRS's standard deduction.

Another point to remember is that the amount of interest on your loan goes down each year you pay on your mortgage (all standard home-loan formulas pay off interest first before significantly paying into principal). That's why paying extra on your principal every year can help you pay off your loan early.

Are points deductible?

If you are a buyer, and you or the seller pays points, they are deductible for the year in which they are paid only. You also can deduct any points you pay when you refinance your home, but you must do so ratably over the life of the loan. Consult your tax or financial advisor.

Are home improvements deducible?

What you spend on permanent home improvements, such as new windows, can be added into your home's cost basis, or amount of money invested in a home, which reduces capital gains when it comes time to sell. Capital gains are determined by the difference in price from the time a home is purchased and the time it is sold, minus the cost of any permanent improvements.

However, the 1997 tax changes virtually eliminates the capital gains tax for most homeowners (the exemption is $250,000 for single homeowners and $500,000 for married homeowners.)

Still, it is worthwhile to save all receipts for permanent home improvements just in case. They also can be useful documentation when it comes to marketing your home when you sell.