Real Estate Tax Tips

Dated: March 14 2024

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Sale of Residence - Real Estate Tax Tips

You may qualify to exclude from your income all or part of any gain from the sale of your main home. Your main home is the one in which you live most of the time.

Ownership and Use Tests

To claim the exclusion, you must meet the ownership and use tests. This means that during the 5-year period ending on the date of the sale, you must have:

  • Owned the home for at least two years (the ownership test)
  • Lived in the home as your main home for at least two years (the use test)

Gains

If you have a gain from the sale of your main home, you may be able to exclude up to $250,000 of the gain from your income ($500,000 on a joint return in most cases).

Loss

You cannot deduct a loss from the sale of your main home.

Reporting the Sale

Report the sale or exchange of your main home on Form 8949, Sale and Other Dispositions of Capital Assets, if:

  • You have a gain and do not qualify to exclude all of it,
  • You have a gain and choose not to exclude it, or
  • You received a Form 1099-S.

Real Estate (Taxes, Mortgage Interest, Points, Other Property Expenses)

I have a mortgage for land that I intend to build a home on. Can I take the home mortgage interest deduction? 

No, you can't deduct interest on land that you keep and intend to build a home on. However, some interest may be deductible once construction begins. You can treat a home under construction as a qualified home for a period of up to 24 months, but only if it becomes your qualified home at the time it's ready for occupancy.

I took out a home equity loan secured by my main home to pay off personal debts. Is this interest deductible? 

For tax years 2018 through 2025, no. Interest paid on a loan secured by your main home or second home may be deductible, subject to certain dollar limitations, only if the proceeds of the loan are used to buy, build, or substantially improve the taxpayer’s residence. 

For tax years before 2018 and after 2025, yes. Interest paid on a home equity loan secured by your main residence or second home may be deductible, subject to certain dollar limitations, regardless of how the proceeds of the loan are used. 

Is the mortgage interest and real property tax I pay on a second residence deductible?

For tax years before 2018 and after 2025, yes. Interest paid on a home equity loan secured by your main residence or second home may be deductible, subject to certain dollar limitations, regardless of how the proceeds of the loan are used.

State and local real property taxes are generally deductible.

Renting out your second residence - If you do rent out your second residence, and you use it personally, additional rules may impact the deductibility of mortgage interest and real property taxes. Please see the publications listed below for additional information.

Rental Income and Expenses 

You generally must include in your gross income all amounts you receive as rent. Rental income is any payment you receive for the use or occupation of property.

Expenses of renting property can be deducted from your gross rental income. You generally deduct your rental expenses in the year you pay them. Publication 527 includes information on the expenses you can deduct if you rent a condominium or cooperative apartment, if you rent part of your property, or if you change your property to rental use.

When to Report Income

Report rental income on your return for the year you actually or constructively receive it, if you are a cash basis taxpayer. You are a cash basis taxpayer if you report income in the year you receive it, regardless of when it was earned. You constructively receive income when it is made available to you, for example, by being credited to your bank account.

Advance Rent 

Advance rent is any amount you receive before the period that it covers. Include advance rent in your rental income in the year you receive it regardless of the period covered or the method of accounting you use.

Security Deposits

Do not include a security deposit in your income when you receive it if you plan to return it to your tenant at the end of the lease. But if you keep part or all of the security deposit during any year because your tenant does not live up to the terms of the lease, include the amount you keep in your income in that year.

If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. Include it in your income when you receive it.

Expenses Paid by Tenant

If your tenant pays any of your expenses, the payments are rental income. You must include them in your income. You can deduct the expenses if they are deductible rental expenses

Property or Services in Lieu of Rent

If you receive property or services, instead of money, as rent, include the fair market value of the property or services in your rental income.

If the services are provided at an agreed upon or specified price, that price is the fair market value unless there is evidence to the contrary.

Personal Use of Vacation Home or Dwelling Unit 

If you have any personal use of a vacation home or other dwelling unit that you rent out, you must divide your expenses between rental use and personal use. See figuring days of personal use and how to divide expenses in Publication 527. If your expenses for rental use are more than your rental income, you may not be able to deduct all of the rental expenses

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