Property tax and mortage interest deductions for multiple homes

[ishway01]

hi,

We have 3 properties and we lived in 2 of them last year.

my questions are:

1.) Which property can I deduct my property tax for?  Is it all 3 or only primary and 1 secondary home or the top 2 properties that I paid the most property tax for?

2.) Since 1 of 3 properties was part rental and part primary residence for 2013, what can I deduct for mortgage interest and property tax?

thank you

[CWirth · Accepted solution]

Hello ishway01,

Owning a second home, or even a third or fourth, may entail multiple mortgages and loan payments, but it could give you some tax benefits, too. A lot depends on how you use any homes that are not your principal residence. If you have multiple homes that you rent out, you can take some tax deductions on the rentals but have to report any income you get.

Interest

The big deduction on a mortgage is the interest. You can deduct 100 percent of the interest on a mortgage on your primary home. You also can deduct all the interest on a second home, but never on more than two homes. A dollar limit applies. Your total mortgages on the two homes can't exceed $1.1 million, as of 2012.

Property Taxes

You also can deduct property taxes on your mortgaged homes. There's no limit on the number of homes on which you can claim these deductions, but taxes have to be paid to a governmental taxing authority based on the assessed value of the home. You also can deduct some sales taxes on mobile or prefabricated homes, but these are likely to be onetime taxes, while property taxes are charged each year.

Actual Payments

Your mortgage interest and real estate taxes have to be based on what you actually paid during a tax year, not on how much your lender charged for an escrow account used to pay tax bills. If your lender collects $100 a month in escrow for taxes and the actual payment for that year is only $1,000, you can't deduct the $200 difference.

Prepaid and Points

You can deduct prepaid interest and taxes, and also any mortgage points, charged when you close a mortgage. Points paid on a second home can't be fully deducted in the year you close, but must be spread over the life of the loan.

Rental Limits

Any home you rent out may be considered a rental and not qualify for an interest deduction. You must use a second home at least 14 days a year or 10 percent of the time it's rented, whichever is longer, to qualify for an interest deduction. You get no interest deduction on more than two homes. You still might get some interest deduction on multiple homes, however, applied against your rental income as a rental expense.

For the period of time you rented out the third residence, you can claim the income and expenses on Schedule E. There you can deduct the rental portion of mortgage interest and property taxes.

Hope this helps.

Thank you for choosing TurboTax!

Have a wonderful day.

[ishway01]

thank you TurboTaxCaryW,
this is helpful.  where I'm stuck is of the 3 properties, say A, B, and C

A - currently my primary residence and has been since the last 2 months of tax year 2013
B - my previous primary residence/current rental, ie. I live there for the first 10 months of tax year 2013, then rented it out for last 2 months once I moved to property A.
C - my second home where my in-law live and I don't collect rent

For mortgage interest, I was going to deduct A and B since they are/were my primary residences, however, the deductible interest for A is less than what I paid on C (where I've never lived in).

my question is, for the entirety of mortgage interest deduction since I can only deduct up to 2 properties, I will deduct
- 10 months of interest for residence B
- 12 months of interest for residence C (which is higher than A, my current primary residence)

is this correct?
thank you

[User0011]

Turbo Tax, however, will deduct all three mortgage interests, and invite you to enter even more 1098s on the interview screen. So, it will apparently have you violate the tax law, which allows only two interest amounts (corresponding to two homes) to deduct, if you don't catch this yourself.  

I just did a hypothetical scenario to check whether Turbo would only allow two homes' mortgage interest deductions. Finding the law is not that easy, and it's kind of vague about property taxes on the third home. That's why I tried it with Turbo to see if they would implement the law for me. I guess not. Beware.