Get to Know These Home Deductions for Next Year

Courtesy of  Drew Cockrell, Coldwell Banker, Atlanta:

The end of one tax season is a perfect time to start planning for the next one.  Start now so you can plan for a smooth tax prep next year.  Here are some key provisions:

Taxes—What You Can and Cannot Deduct

You can deduct real estate taxes, whether you pay them directly or through an escrow account. But be careful: not everything that may be called a "tax" is really a tax, according to IRS rules. "An itemized charge for services to specific property or people is not a tax, even if the charge is paid to the taxing authority." For example, a $5 fee charged for every 1,000 gallons of water you use or $20 per month for trash collection are not taxes and are not deductible.

Home Mortgage Interest

In most cases, all mortgage interest is deductible. But a couple may find itself limited if the total mortgage balance is over $1 million or if the mortgage was for reasons other than buying, building or improving a house.

The IRS gives a broad interpretation of interest. In most cases, both late payment penalties and mortgage prepayment penalties are deductible.

Special Tax Rules for Selling a Home

Homeowners considering selling their home will want to consider the guidance in  Publication 523. Those realizing a substantial profit might be worried about taxes, but the IRS grants a nice break.: A couple selling a home gets to exclude $500,000 in profit (it's $250,000 for a single homeowner).

However, the IRS wants to make sure it really is your main home. Among other conditions, you must have owned the home and used it as your main home during at least two of the last five years before the date of sale.

Many of these rules and provisions come with conditions and exceptions, so it's wise to read the full rules, and consult a tax professional before making a decision.