Whether self-employed or a W2 employee, you probably qualify for a tax deduction on your home mortgage interest. You may also be able to deduct the points you paid on your home mortgage. If you itemize, you can usually deduct the interest you pay on a mortgage for your primary residence or a vacation home, but there are some restrictions. It is advisable to contact your tax professional for specifics.
Who gets to take the deduction? As the primary borrower, you are legally obligated to pay the debt on your home mortgage, therefore you are eligible for the tax deduction. If you are married and both you and your spouse sign for the loan, then both of you are considered primary borrowers. You would also be eligible if you legally co-sign a mortgage loan.
Any special circumstances that should be considered? If any of the following apply to your situation, please delve into this further with your trusted tax professional:
- A second home that you rent out for a portion of the year. If you use the home you rent out for fewer than the required number of days, your home is considered a rental property, not a second home.
- If you live in your home before your purchase becomes final, any payments you make during that period of time are considered rent.
- If you use the proceeds of a home loan for business purposes.
- If you own rental property and you borrow against it to buy a home.
What information will you need? Even if you’re having a professional help you with your income tax return, you need to provide them with information on the money you spent that might be deductible. Review the following list to determine if any of these situations could apply to you.
- If you refinanced your home for the second or subsequent time in 2014, there may be points that can be taken as an interest charge.
- If you’re paying mortgage insurance premiums, you may be able to deduct them.
- If you purchased a home in 2014, there may be some deductions found on the HUD-1 form you received at closing. If you no longer have a copy of your HUD-1 statement, check with the realtor that assisted you with the transaction.
- If you purchased a home in 2014 and the seller paid points on your behalf, you may be able to deduct them.
- If you purchased and installed in 2014, qualified residential energy efficiency property or improvements, you may be eligible for tax credits.
- If you have dedicated, exclusive space in your home for a home office, you may be eligible for a deduction.
Need more information on a possible home office deduction? According to the IRS rules, home office expenses can only be deducted when a specific area of your home is used regularly and exclusively as your principal place of business. However, if you use the home office space as a place to meet or deal with clients or customers, even if it is not your principal place of business, you may still qualify to take a home office deduction.
If you meet all the requirements to take a home office deduction, you then have the choice as to how to calculate it. You can deduct actual expenses such as a portion of your rent or mortgage interest and utilities, or you can take a standard deduction per square foot.
When you look at your home office, you may see an entire room filled with equipment, furniture and storage that cost you a pretty penny. If you qualify for a home office deduction, you are probably eager to deduct it all. Unfortunately, when figuring a home office deduction for independent contractors, the IRS separates out those less permanent features from the space itself. This is one more area to dig into further with your tax professional.
If you are pursuing a home office tax deduction, you will want to save all documentation relating to direct expenses for your home office and indirect expenses for your entire home. This could include mortgage statements, rent receipts, utility bills, taxes statements and more.
The tax laws and tax rules are constantly being updated and interpreted. The above information is general, so please discuss your individual situation with a tax adviser before making tax decisions.