If you’re buying a home with someone else – or already have – you may be wondering how to handle your taxes.

Whether you're a first-time homebuyer or an experienced property owner, understanding the tax implications of co-ownership is essential. Taking the right steps can help ensure you file correctly and maximize available deductions.

Key Takeaways

• Your ownership structure affects how you file taxes and what deductions you qualify for.

• Filing jointly with a co-owner often provides the greatest benefit, particularly for mortgage interest and property tax deductions.

• Homeowners may be eligible for several tax deductions, including mortgage interest, property taxes, private mortgage insurance, and energy-efficient home upgrades.

1. Consider What Your Ownership Status Is

Joint Tenancy

Joint tenancy occurs when two or more people hold an equal ownership interest in a property. This means that each person has an equal right to use the property, and upon the death of one owner, their interest is automatically transferred to the surviving tenant(s).

Each owner can deduct their share of mortgage interest and property taxes on their federal tax returns.

Tenancy in Common

Tenancy in common means two or more people own a property together, but unlike joint tenancy, their shares can be unequal, and there are no survivorship rights. If one tenant dies, their share goes to their estate rather than to the co-tenant(s). 

Each tenant in common can deduct their portion of the mortgage interest and property taxes, relative to their ownership percentage, on their federal tax returns.

Tenancy by the Entirety

Tenancy by the entirety is a special form of ownership that is available only to married couples or, in some states, domestic partners. Like joint tenancy, there are survivorship rights, meaning if one spouse or partner dies, the surviving party becomes the sole owner of the property. 

For federal tax purposes, if the spouses file jointly, they can deduct the total amount of mortgage interest and property taxes paid. If they file separately, the deductions are typically divided based on each spouse's ownership interest. (Domestic partners cannot file federal taxes jointly.)

2. File Jointly (Most of the Time, if You Can)

Most spouses find that filing federal taxes jointly simplifies the process and often leads to greater tax benefits. They can combine their income and deductions by filing jointly, usually allowing for maximized mortgage interest and property tax deductions.

However, there are certain situations where filing jointly may not be advantageous. For example, if you or your spouse have high medical expenses, filing jointly could disqualify you from the federal medical expenses deduction.

Similarly, if one spouse has significant debt or unpaid child support, filing separately could protect the other spouse's share of any tax refund.

3. Deduct Mortgage Interest

The mortgage interest deduction is one of the key tax benefits available to homeowners. This deduction allows homeowners to reduce their taxable income by the interest paid on their mortgage throughout the tax year. 

Mortgage Interest Deduction Basics

As part of your monthly mortgage payment goes toward interest on the loan, the IRS allows you to deduct this expense from taxable income and lower your overall tax liability.

To claim your mortgage interest deduction, itemize your deductions on Schedule A of your federal tax return.

Splitting Mortgage Interest Deduction Between Joint Owners

The mortgage interest deduction is usually straightforward for co-owners who file taxes jointly, as they can claim the total amount of interest paid.

However, if the co-owners file separately, they must split the mortgage interest deduction based on their ownership interests. Each co-owner must report their share of the mortgage interest on their individual tax return.

Limits on Mortgage Interest Deduction

There are limits to the mortgage interest deduction. The deduction is generally allowed on mortgage debt up to $750,000 ($375,000 if married and filing separately) for loans taken out on or after December 16, 2017. 

For loans taken out before this date, the limit is $1 million ($500,000 if married and filing separately).

Military and Ministers Housing Allowance

Members of the military and ordained ministers may be eligible for a housing allowance, which can affect their mortgage interest deduction. The housing allowance is generally tax-free but can be used to cover housing expenses, including mortgage interest. 

In these cases, the homeowner can still claim a mortgage interest deduction on the portion of interest not covered by the housing allowance.

4. Deduct Home Mortgage Points

Mortgage points are fees you pay to your lender at closing in exchange for a reduced interest rate. Each point typically costs 1% of your mortgage amount, and these points are essentially prepaid interest on your loan. 

Because they're prepaid interest, the IRS allows homeowners to deduct them, just like mortgage interest. However, there are certain criteria you must meet to qualify for this deduction, including:

• The mortgage must be for your primary residence, and paying mortgage points should be a standard practice in your local area. 

• The points must be calculated as a percentage of your mortgage and be clearly marked on your settlement statement. 

• The points must be paid directly, without borrowing the funds from your lender or mortgage broker. 

If you meet these requirements, you can deduct the full amount of the points in the year they were paid. If not, you may still be able to deduct the points over the life of the loan, with a process known as amortization.

5. Deduct State and Local Property Taxes

As a homeowner, you're likely paying local or state property taxes, which are generally based on the assessed value of your home. The good news is that these property taxes can often be deducted from your federal income tax return. 

However, it's important to note that the 2017 Tax Cuts and Jobs Act capped the total deduction for state and local taxes, including property taxes, at $10,000 ($5,000 if married and filing separately). To take advantage of this deduction, you must itemize your deductions on Schedule A of your federal tax return.

6. Note All Home Improvements

As a homeowner, it's vital to document all home improvements. These improvements aren't immediately tax-deductible, but they're important when selling your home.

The money spent on improvements increases your home's cost basis, which in turn reduces your capital gain when you sell, and lower capital gain means less tax owed. 

So, while you can't deduct home improvements right away, they can help limit your tax bill later. Always consult with a tax professional for accurate tracking and documentation.

7. Mortgage Interest Credits

Financial difficulties can arise for various reasons, and homeowners are not exempt from such challenges. Fortunately, there are programs designed to assist those facing financial hardships.

A credit you can take advantage of is the mortgage interest credit, a tax credit provided by the IRS to help lower-income individuals afford homeownership. If you qualify, you could reduce your tax bill on a dollar-for-dollar basis.

You need a mortgage credit certificate (MCC) from your state or local government to receive this credit. The MCC will show the mortgage interest rate, which you can claim on IRS Form 8396.

8. Energy-Efficient Tax Credits

If you upgraded your home with eligible energy-efficient improvements after Jan. 1, 2023, you could receive a tax credit of up to $3,200. This credit is available for qualifying upgrades made through 2032. More details are available on the IRS website.

9. Pay Your Home Mortgage Fully

It's crucial to ensure that your home mortgage debts are fully covered, even if you aren't technically or legally responsible for the entire amount. This is especially important when co-owning a property, as both parties are generally liable for the mortgage. 

If one party fails to meet their financial obligations, it could lead to serious consequences, such as foreclosure or damage to your credit score.

If the other party is not fulfilling their financial responsibility, consider seeking legal action. Consult with an attorney specializing in real estate law to explore your options for holding the other party accountable.

10. Prepare the Documents You’ll Need

Document preparation and storage is a crucial part of tax filing for homeowners. Some of the important documents you may need include:

• IRS Form 1098 (mortgage interest statement).

• Mortgage credit certificate.

• Settlement statement.

• Property tax statement.

• IRA withdrawal documents.

• Home improvement invoices.

• Insurance loss documentation.

• Form 8829 (expenses for business use of home).

Keeping track of all these documents can be a challenging task.With Trustworthy's Family Operating System®, you and the co-owner(s) of the house can organize all your tax and family documents in a secure location and share them as needed.

If you’re hiring a tax professional to help you and the co-owner(s) of the home file your taxes, you can share these documents through Trustworthy's SecureLinks™. The Family Operating System® creates a unique link to your file or data, letting you choose how long the link stays active and who can access it.

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