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THE LAW RECOGNIZES THREE KINDS OF PROPERTY

 1. Land

 2. Buildings on the land (usually called “improvements”)

 3. Personal (usually moveable objects made by people)

Even though land and improvements can be taxed individually in some states, typically, when someone talks about “real estate” or “real property”, they are talking about both the land and the buildings (or improvements) on it. Some states will also tax personal property, such as vehicles, valuable artwork, stocks, bonds, etc.

Mortgage

Interest is an acceptable deduction on an itemized tax return when mortgage funds are used to purchase or refinance either a primary or secondary home. To claim this deduction, the taxpayer must have the legal responsibility to repay the debt. A tenant paying rent could not claim the deduction even though his rent is used to pay the mortgage, because the landlord has the legal obligation and, therefore, is the only party allowed to take the deduction.

Secured debt

The mortgage must be a secured debt—meaning that the taxpayer signs a legal document for a loan with the property as collateral to protect the lender’s interest.

Home equity loan interest

 A home equity loan involves a homeowner borrowing against the equity he or she has in a property. typically, with a second mortgage, interest on this loan is an allowable deduction, as long as it meets the IRS requirements (which we’ll talk about a little later).

Mortgage pre-payment penalty

 This is a financial penalty for repaying a mortgage loan early. It is a deductible expense as long as the penalty is mortgage interest and not a fee for a service on the loan. Points are sometimes charged in making mortgage loans. Each point constitutes 1% of the loan amount and generally represents prepaid interest. Points are a one-time expense, usually paid at or before the loan closing. As with many IRS rules, when and how you deduct mortgage points depends on passing tests and meet requirements.

Typically, the IRS requires you to deduct points equally across the life of the mortgage loan. You are allowed to deduct points in this way, as long as:

Secured debt

The mortgage must be a secured debt—meaning that the taxpayer signs a legal document for a loan with the property as collateral to protect the lender’s interest.

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