Income Tax Deductions
Home Refinancing Points
If you refinanced your home, you may be eligible to deduct some costs associated with your loan.
Generally, if you itemize, the “points” paid to obtain your home mortgage may be deductible as mortgage interest. Points paid to obtain an original home mortgage can be, depending on circumstances, fully deductible in the year paid. However, points paid solely to refinance a home mortgage usually must be deducted over the life of the loan.
For a refinanced mortgage, the interest deduction for points is determined by dividing the points paid by the number of payments to be made over the life of the loan. This information is usually available from lenders. You may deduct points only for those payments made in the tax year. For example, a homeowner who paid $2,000 in points and who would make 360 payments on a 30-year mortgage could deduct $5.56 per monthly payment, or a total of $66.72 if he or she made 12 payments in one year.
However, if part of the refinanced mortgage money was used to finance improvements to your home and if you meet certain other requirements, the points associated with your home improvements may be fully deductible in the year you paid the points. Also, if you are refinancing a mortgage for a second time, the balance of points paid for the first refinanced mortgage may be fully deductible at pay off.
Other closing costs — such as appraisal fees and other non-interest fees — generally are not deductible. Additionally, the amount of Adjusted Gross Income can affect the amount of deductions that can be taken.
Frequently Asked Questions
I refinanced my home last year and paid points. Are they all deductible this year?
Generally points paid to refinance your home are not deductible in their entirety in the year paid. They are "amortized" or deducted over the life of the loan.
If I must deduct points over the life of my mortgage, and I have a 30 year mortgage, does this mean that I divide the points paid by 30 and enter that amount on Schedule A?
No, you don't divide the points by 30. If you choose to use the straight-line method, you need to divide the points by the number of payments over the term of the loan and deduct points for a year according to the number of payments made in the year. If the loan ends prematurely, due to payoff or refinance with a different lender, for example, then the remaining points are deducted in that year. Points not included in Form 1098, the Mortgage Interest Statement reported to you by your financial institution (usually not included on a refinance), should be entered on line 12 of Form 1040, Schedule A, Itemized Deductions.
For details on home refinancing deductions and points, see IRS Publication 936: Home Mortgage Interest Deduction (PDF 139kb).
Income Tax Deductions
Home Moving Expenses
If you moved your home because of a change in your job location or because you started a new job, you may be able to deduct your moving expenses if your move is closely related to the start of work. To qualify for the moving expense deduction, you must meet the distance and the time tests.
Distance Test
Your move will meet the distance test if your new main job location is at least 50 miles farther from your former home than your old main job location was. Use the shortest distance of the most commonly traveled routes between these points. To determine this, first figure the distance between your former home and your new job and then subtract the distance between your former home and your old job. If the result is 50 miles or more, you have met the distance test. For example, if the distance from your former home to your new job is 70 miles and the distance from your former home to your old job is 5 miles, you will meet the distance test. If you are a member of the armed forces and your move was due to a permanent change of station, you do not have to meet the distance test.
Time Test
The second test concerns time. If you are an employee, you must work full–time for at least 39 weeks during the 12 months right after you move. If you are self–employed, you must work full time for at least 39 weeks during the first 12 months and for a total of at least 78 weeks during the first 24 months after you move. If you have not met the time test by the date your tax return is due, you may still deduct your moving expenses on your return as long as you expect to meet the time test. Then, if you do not meet the test, you must either:
- Amend your tax return; or
- Report the amount you deducted on the tax return as income on your next tax return if you had expected to meet the 39–week test, or on your tax return two years from when you took the deduction if you had expected to meet the 78–week test.
If you are married and are filing a joint return, only one spouse must meet the time test. You cannot, however, add the weeks your spouse worked to those you worked to satisfy the test. In general, you do not have to meet the time test if:
- You are in the armed forces on active duty and your move was due to a permanent change of station; or
- Your job at the new location ends because of death, disability, a transfer for your employer's benefit, or a layoff other than for willful misconduct; or
- You moved from outside of the United States to the United States because you retired, or you are the surviving spouse or dependent of a person who died while living and working outside the United States, and your move begins within 6 months of that person's death.
Deductible Moving Expenses
If you meet the requirements, you can deduct the reasonable expenses of moving your household goods and personal effects to your new home. You can also deduct the expenses of traveling to your new home, including your lodging expenses. You cannot, however, deduct meals or any moving expenses that were reimbursed by your employer.
Moving expenses are figured on IRS Form 3903 and deducted as an adjustment to income on Form 1040. For more details, see IRS Publication 521: Moving Expenses (PDF 139kb).
Income Tax Deductions
Selling Your Home
If you sell your main home, you may be able to exclude up to $250,000 of gain ($500,000 for married taxpayers filing jointly) from your federal tax return. This exclusion is allowed each time that you sell your main home, but generally no more frequently than once every two years. You cannot deduct a loss from the sale of your main home.
Ownership and Use Tests
To be eligible for this exclusion, your home must have been owned by you and used as your main home for a period of at least two out of the five years prior to its sale. The two years may consist of 24 full months or 730 days. Short absences, such as for a summer vacation, count as periods of use. Longer breaks, such as a one-year sabbatical, do not.
If you and your spouse file a joint return for the year of the sale, you can exclude the gain if either of you qualify for the exclusion. However, both of you would have to meet the use test to claim the $500,000 maximum amount.
If you can exclude all the gain from the sale of your home, you do not report any of that gain on your federal tax return. If you cannot exclude all the gain from the sale of your home, use Schedule D, Capital Gains or Losses, on Form 1040 to report it.
Exceptions to Ownership and Use Tests
If you do not meet these ownership and use tests, or if during the two-year period ending on the date of the sale or exchange you sold or exchanged another home at a gain and excluded all or part of that gain, you may be allowed to exclude a portion of the gain realized on the sale or exchange of your home if you sold your home due to health, a change in place of employment, or certain unforeseen circumstances. Unforeseen circumstances include, for example, divorce or legal separation, natural or man-made disaster resulting in a casualty to your home, or an involuntary conversion of your home.
If you were on qualified extended duty in the U.S. Armed Services or the Foreign Service you may suspend the five-year test period for up to 10 years. You are on qualified extended duty when, for more than 90 days or for an infinite period, you are at a duty station that is at least 50 miles from the residence sold, or residing under orders in government housing.
Installment Sales
If you sell your home under a contract that provides for part or all of the selling price to be paid in a later year, you made an "installment sale." If you finance the buyer's purchase of your home yourself, instead of having the buyer obtain a loan or mortgage from a bank, you probably have an installment sale. See IRS Publication 537: Installment Sales for details in this situation.
For more information on the tax rules that apply when you sell your main home, see IRS Publication 523: Selling Your Home (PDF 192kb).
Income Tax Deductions
Selling Your Home: FAQs
I sold my principal home this year. What form do I need to file?
If you meet the ownership and use tests, you will generally only need to report the sale of your home if your gain is more than $250,000 ($500,000 if married filing a joint return). This means that during the 5-year period ending on the date of the sale, you must have:
- Owned the home for at least 2 years (the ownership test), and
- Lived in the home as your main home for at least 2 years (the use test)
If you owned and lived in the property as your main home for less than 2 years, you may still be able to claim an exclusion in certain cases, although the maximum amount you can exclude will be reduced. If you are required or choose to report a gain, it is reported on Form 1040, Schedule D, Capital Gains and Losses. This exclusion is generally allowed no more frequently than once every two years. For additional information, see Income Tax Deductions: Selling Your Home.
If I sell my home and use the money I receive to pay off the mortgage, do I have to pay taxes on that money?
It is not the money you receive for the sale of your home, but the amount of gain on the sale over your cost, or basis, that determines whether you will have to include any proceeds as taxable income on your return. You may be able to exclude any gain from income up to a limit of $250,000 ($500,000 on a joint return in most cases). If you can exclude all of the gain, you do not need to report the sale on your tax return.
If I take the exclusion of capital gain tax on the sale of my old home this year, can I also take the exclusion again if I sell my new home in the future?
With the exception of the 2-year waiting period, there is no limit on the number of times you can exclude the gain on the sale of your principle residence so long as you meet the ownership and use tests.
I lived in a home as my principal residence for the first 2 of the last 5 years. For the last 3 years, the home was a rental property before selling it. Can I still avoid the capital gains tax and, if so, how should I deal with the depreciation I took while it was rented out?
If, during the 5-year period ending on the date of sale, you owned the home for at least 2 years and lived in it as your main home for at least 2 years, you can exclude up to $250,000 of the gain ($500,000 on a joint return in most cases). However, you cannot exclude the portion of the gain equal to depreciation allowed or allowable for periods after May 6, 1997. This gain is reported on Form 4797. If you can show by adequate records or other evidence that the depreciation allowed was less than the amount allowable, the amount you cannot exclude is the amount allowed. Refer to IRS Publication 523: Selling Your Home for specifics on calculating and reporting the amount of the eligible exclusion.
Is the loss on the sale of your home deductible?
The loss on the sale of a personal residence is a nondeductible personal loss.
I have a home office. Can I deduct expenses like mortgage, utilities, etc., but not deduct depreciation so that when I sell this house, the basis won't be affected?
If you qualify to deduct expenses for the business use of your home, you can claim depreciation for the part of your home that is a home office. Generally, the part of your home that is a home office is depreciated over a recovery period of 39 years using the straight line method of depreciatiion and a mid-month convention. If you do not claim depreciation on that part of your home that is a home office, you are still required to reduce the basis of your home for the allowable depreciation of that part of your home that is a home office when reporting the sale of your home. For more information, refer to IRS Publication 587: Business Use of Your Home.
