Real Estate Guide

Home Ownership - Questions and Answers
'Tax Considerations'

• What tax benefits are there to homeowners?
• Explain the home mortgage deduction.
• How do I save on taxes?
• What home-buying costs are deductible?
• Can I deduct the loss I suffered when I sold my home?
• Are points deductible?
• Are taxes on second homes deductible?
• Should I buy a vacation home?
• Will my vacation home qualify for a '?1031 Exchange'
• Can you deduct the cost of home improvements?
• What are the rules on capital gains when inheriting a house?
• Are the costs of a natural disaster deductible?
• How are fees and assessments figured in a homeowners association?
• Where do I get information on IRS publications?
• How do I reach the IRS?

What tax benefits are there to homeowners?

Homeowners benefit from several generous tax advantages:

• The most important benefit is the mortgage interest deduction. People may deduct interest paid on mortgage loans totaling up to $1 million used to buy, build or improve a principal residence plus a second home. The IRS calls such loans acquisition debt.
• Points paid by the buyer or seller on a new mortgage loan for the purchase or improvement of a principal residence are deductible for the year in which the home was purchased.
• Any points paid on a refinance mortgage, a loan to purchase a second home or a mortgage on income property must be spread over the life of the loan, according to Edith Lank and Miriam S. Geisman, authors of "Your Home as a Tax Shelter," Dearborn Financial Publishing, Chicago; 1993.
• Note that when obtaining a new mortgage, the borrower usually is asked to pay interest from the closing date until the first of the next month. Check whether that charge is included in the year- end report
• New in 2007, homeowners earning under $110,000 adjusted gross income can deduct, for the 2007 tax year only, some or all of the PMI premium on mortgages closed only in 2007. Congress would need to renew this deduction to be valid for any tax years beyond 2007. (Consult with your attorney or tax accountant.)

  Note: the Mortgage Debt Cancellation Relief Act extends the PMI deduction for mortgage insurance premiums through tax year 2010.

• If you take out a home equity loan, the interest on that loan is also deductible - and it doesn't matter how you spend the proceeds of the loan.
• Property taxes on all real estate, including those levied by state and local governments and school districts, are normally fully deductible against current income,
• Some moving expenses are deductible for people who changed jobs and relocated as a result. These rules change at the whim of Congress and/or interpretation of the IRS, so consult with your tax advosor to properly apply the current IRS rules.
   
• One often overlooked tax advantage is that owning a home opens the doors to itemize your tax return. If you itemize you'll find that you can now deduct many other items not related to home ownership that are not currently available to you taking just the standard deduction.

Note: "A homeowner cannot deduct maintenance expenses, nor can he take depreciation deductions on his personal residence," states the "Realty Bluebook," 30th Ed., Dearborn Financial Publishing, Chicago; 1993.

Resources:

• "530 "Tax Information for First-Time Homeowners," a free guide published by the Internal Revenue Service. Order by calling 1- 800-TAX-FORM.

Explain the home mortgage deduction.

The mortgage interest deduction entitles you to completely deduct the interest on your home loan for the year in which you paid it. Mortgage interest is not a dollar-for-dollar tax credit.  It is a deduction. Therefore, you will subtract the interest you paid for the tax year in question from your total taxable income so that your taxes will be figured on a reduced sum. The home mortgage deduction reduces taxable income.

In order to benefit from the deduction you cannot simply take the standard deductions offered by the IRS - you must itemize deductions. Your total itemized deductions must, therefore, exceed the IRS's standard deductions in order to realize any savings.

Another point to remember is that the amount of interest on your loan goes down each year you pay on your mortgage (all standard home-loan formulas pay off interest first before significantly paying into principal). That's why paying extra on your principal every year can help you pay off your loan early.

Seek the advice of  the IRS or tax advisor before applying the mortgage interest deduction.

How do I save on taxes?

See >> Real Estate Guide: Buying Your Home (Tax Considerations) -  How do I save on taxes?)

What home-buying costs are deductible?

See >> Real Estate Guide: Buying Your Home (Tax Considerations) -  What home buying costs are deductible?

Can I deduct the loss I suffered when I sold my home?

See >> Real Estate Guide: Selling Your Home (Tax Considerations) - Can I deduct the loss I suffered when I sold my home?

Are points deductible?

See >> Real Estate Guide: Buying Your Home (Tax Considerations) -  Are points deductible?

Are taxes on second homes deductible?

See >> Real Estate guide: Investing In Real Estate - Tax Considerations,  Taxes on Second Homes.

Should I buy a vacation home?

See >>  Real Estate Guide: Investing In Real Estate (Tax Considerations) -  Vacation Home

Will a vacation home qualify for tax deferral under IRC ?1031 (commonly known as a '1031 Exchange').

See >>  Real Estate Guide: Investing In Real Estate (Tax Considerations)- 1031 Exchange

Can you deduct the cost of home improvements?

See >> Real Estate Guide: Home Ownership (Home Improvements) -  Can you deduct the cost of home improvements?

What are the rules on capital gains when inheriting a house?

When children inherit a home, the Internal Revenue Service determines their basis in the property on the date of the owner's death. The cost basis is not the amount the owner originally paid for the house, but the property's fair-market value on the date of the parent's death.

Cost basis is a tax term for the dollar amount assigned to a property at the time it is acquired, for the purpose of determining gain or loss when it is sold. For example, one of the three siblings sold his or her share of a property to be divided equally, he or she must pay capital gains tax for whatever profit made over one-third of the new basis. Other tax consequences include estate taxes.

However, the estate must total $675,000 or more for tax year 2001 before tax issues become a concern. The IRS allow residents to pass on property, cash and other assets worth up to a total of $675,000 for tax year 2001 before charging the heirs any taxes. This figure will rise each year for the next several years.

Regarding the transfer of ownership, quit-claim deeds often are used between family members in situations such as this when an heir is buying out the other. All parties must be agreeable to dropping a name from the title.

For more information, consult the IRS's Publication 950, "Federal Estate and Gift Taxes." Order by calling 1-800-TAX-FORM.

For more information

• What are Capital Gains?
• IRS Publication # 551 "Basis of Assets"
• IIRS ? 121. Exclusion of gain from sale of principal residence
• IRS's Publication 950, "Federal Estate and Gift Taxes."
• Order by calling 1-800-TAX-FORM.

Are the costs of a natural disaster deductible?

Damage, destruction or loss of property from fires, floods, earthquakes and other disasters are normally deductible from both state and federal income taxes. In such a case, the IRS only allows a deduction less than or equal to the fair-market value of the property before the disaster.

How are fees and assessments figured in a homeowners association?

See >> Real Estate Guide: Home Ownership (Associations) - Fees and Assessments

Where do I get information on IRS publications?

See >> Real Estate Guide: Whom To Call (Resources) - Where do I get information on IRS Publications.

How do I reach the IRS?

• Call (800) TAX-1040.
• On the web (www.irs.gov)