Your home is probably the largest single purchase you will ever make, and it may also be your largest single investment. During normal times, home prices typically appreciate by 2 to 5 percent per year. On top of the potential growth, home ownership gives you some significant tax breaks, like the mortgage interest deduction. Still, there are some home buying costs, including the appraisal, that you can't write off.
Deductible Vs. Non-Deductible
You can write off the mortgage interest on loans of up to $1 million for your first and second homes. This is a huge tax break if the two of you owned homes before you got married, or if you want to buy a vacation home. In some cases, you can deduct the points you paid to get the loan. As a general rule, though, most other expenses associated with buying and maintaining homes are not deductible. Besides the appraisal, you can't write off any of your settlement costs, such as title insurance fees.
Paying settlement fees can sting less if you add them to your home's cost basis. When you sell the home, you'll have a smaller capital gain and a lower tax obligation. The IRS doesn't allow you to include some settlement costs with your home's cost basis, including appraisal fees required by the lender.
Most people choose the standard deduction on their taxes because it's easier to figure and, in most cases, results in a lower tax bite. If you want to deduct any home-related expenses, you'll have to itemize deductions. You'll also need to keep records to justify any adjustments to your home's cost basis, such as settlement fees. The IRS doesn't care what form those records take, as long as they are clear and accurate.
While you can't deduct settlement costs on your personal property, you can deduct them for business property. The IRS considers a rental home business property, so you can deduct its operation costs. You'll have to write off those expenses according to the IRS's amortization schedule.
- How to Get a Loan for a Garage Addition
- Advantages & Disadvantages of Buying a House in Cash
- How to Calculate the Interest on a Mortgage Loan
- What Is HUD Partial Claim & Notification?
- How to Improve Net Worth & Accumulate Assets
- How Does Refinancing With No Closing Costs and No Points Work?
- The Occupancy Clause in a Mortgage
- How to Treat an Installment Land Contract as a Mortgage
- How to Figure the Amount of Interest on a Mortgage Loan
- Can I Receive a Perkins Loan & Subsidized Loans?