PROPERTY TAXES:

Property taxes are deductible on both a personal residence and other real estate owned without limit if the taxpayer itemizes deductions. This differs from mortgage interest which is limited both by the amount and type of debt and the number of properties owned. Taxpayers that own real property used in a trade or businesses deduct the property taxes on the appropriate business or rental property schedule. Taxes on personal residences, vacation homes, other real property and vacant land are deducted on Schedule A - Itemized Deductions.

However, the property tax bill's second cousin, the special assessment is not deductible as a tax. Instead the principal amount of a special assessment is added to the amount of the cost basis of the property and thus lowers the profit upon the eventual sale.

MORTGAGE INTEREST:

Most people who have owned property since the mid-1980s know that mortgage interest has undergone many changes. Some for the worse, some for the better. The initial change of the Tax Reform Act of 1986 was substantially reversed (not totally) by the 1987 Tax Act. Since that is ancient history we won't relive that now.

The current deductibility of mortgage interest depends on several things. The first of these is whether the taxpayer already itemizes deduction or claims the standard deduction. If the standard deduction is claimed and the mortgage interest is insufficient (coupled with other items) to exceed the standard deduction, there is no additional deduction.

Assuming the taxpayer does itemize deductions, the amount of properties which constitute home mortgage interest is limited to two. A primary residence and one other property, commonly referred to as a second home. This may be a true second home, or for a child at college, a parent, vacation home, time share and possible recreational housing such as a motor home or boat. In order to qualify as a "home" there must be kitchen, sleeping and lavatory facilities. Rental properties and business properties are not considered in this limit of two and are claimed elsewhere.

The next limitation is on the amount and type of debt on the home(s). The law allows deductions for interest paid on mortgage debt up to $1,000,000 of debt (not interest) that was used to buy, build, or improve the personal residence(s). Additionally, one may borrow up to $100,000 of debt, use the proceeds for other purposes and deduct this interest. For all practical purposes, there is then a debt limit of $1,100,000 on the mortgages encumbering the residence(s). There are some variations, exceptions, exemptions, and limitations on these rules (aren't there always?) which usually will not apply to most taxpayers.