Tax Considerations When Buying a Home
Where do I get information on IRS publications?
The Internal Revenue Service publishes a number of real estate publications. They are listed by number:
521 - "Moving Expenses"
523 - "Selling Your Home"
527 - "Residential Rental Property"
534 - "Depreciation"
541 - "Tax Information on Partnerships"
551 - "Basis of Assets"
555 - "Federal Tax Information on Community Property"
561 - "Determining the Value of Donated Property"
590 - "Individual Retirement Arrangements"
908 - "Bankruptcy and Other Debt Cancellation"
936 "Home Mortgage Interest Deduction"
Order by calling 1-800- TAX-FORM.
Are seller-paid points deductible?
Homeowners are able to deduct points paid by the seller for federal taxes. This deduction previously was reserved only for points actually paid by the buyer. Check with your local state for any update on local jurisdictions
What home-buying costs are tax deductible?
Any points you or the seller pay to purchase your home loan are deductible for that year. Property taxes and interest are deductible every year. But while other home-buying costs (closing costs in particular) are not immediately tax-deductible, they can be figured into the adjusted cost basis of your home when you go to sell (any significant home improvements also can be calculated into your basis).
These fees would include title insurance, loan-application fee, credit report, appraisal fee, service fee, settlement or closing fees, bank attorney's fee, attorney's fee, document preparation fee and recording fees. Points paid when you refinance an existing mortgage must be deducted ratably over the life of the new loan.
What is the Mortgage Credit Certificate program?
The Mortgage Credit Certificate program allows first-time home buyers to take advantage of a special federal income tax credit. This program allows buyers credit in qualifying for the tax advantage they'll receive after they purchase the home. The amount of the credit is tied to a local formula that every city with an MCC program must follow.
A MCC credit reduces the borrower's federal tax liability by an amount tied to how much one pays in annual mortgage interest. Both the borrower's income and the purchase price of the home must fall within established guidelines.
To see if your community has an MCC program, call your local housing or redevelopment agency. You also may inquire with your real estate broker or the local association of Realtors.
What are the rules for mortgage credit certificates?
To qualify for a mortgage credit certificate, both your income and the purchase price of the home must fall within established city guidelines. These guidelines vary by city but generally only permit people who earn an average income or slightly higher than average income.
A limited number
of cities have authorized the MCC program. Contact your municipal or regional housing
department for more information.
Should I buy a vacation home?
Today a vacation home can be purchased for investment purposes as well as enjoyment. And yes, there are tax benefits. Some people buy a vacation home with the idea of turning it into a permanent retirement home down the road, which puts them ahead on their payments.
Another benefit is that the interest and property taxes are tax deductible, which helps to offset the cost of paying for a second home. A vacation home also can be depreciated if you live in it fewer than 14 days a year, or 10 percent of the rented days - whichever is greater.
~ "Real Estate Investing From A to Z," William Pivar, Probus Publishing, Chicago; 1993.
~ "The Ultimate Language of Real Estate,'' John Reilly, Dearborn Financial
How do I save on taxes?
Here are some ways to save money on taxes:
Mortgage interest on loans up to the current maximum is completely deductible for the year in which you pay it to buy, build or improve your principal residence plus a second home.
Points, or loan origination fees, also are deductible no matter who pays them, the buyer or the seller.
Capital gains - most homeowners, except the wealthy and those living in high-priced markets, no longer need to worry about capital gains taxes. Homeowners should always keep all receipts of permanent home improvements and of mortgage closing costs. If you do have to pay capital gains taxes, these costs can be added to your adjusted cost basis. Consult your tax adviser for the current maximum amounts protected.
"Tax Information for First-Time Homeowners," IRS Publication 530, and "Selling Your Home," IRS Publication 523. Call (800) TAX-FORM to order.
Are taxes on second homes deductible?
Mortgage interest and property taxes are deductible on a second home if you itemize. Check with your accountant or tax adviser for specifics.
How do I choose between buying and renting?
Home ownership offers tax benefits as well as the freedom to make decisions about your home. An advantage of renting is not worrying about maintenance and other financial obligations associated with owning property.
There also are a number of economic considerations. Unlike renters, home owners who secure a fixed-rate loan can lock in their monthly housing costs and make prudent investment plans knowing these expenses will not increase substantially. Home ownership is a highly leveraged investment that can yield substantial profit on a nominal front-end investment. However, such returns depend on home-price appreciation.
What is 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 cut; it reduces taxable income.
You must itemize deductions in order to do this, which means your total deductions must exceed the IRS's standard deduction. 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.
How are fees and assessments figured in a homeowners association?
Homeowners association fees are considered personal living expenses and are not tax-deductible. If, however, an association has a special assessment to make one or more capital improvements, condo owners may be able to add the expense to their cost basis. Cost basis is a term for the money an owner spends for permanent improvements throughout their time in the home and is used to reduce eventual capital gains taxes when the property is sold. For example, if the association puts a new roof on a building, the expense could be considered part of a condo owner's cost basis only if they lived directly underneath it. Overall improvements to common areas, such as the installation of a swimming pool, need to be considered on a case-by-case basis but most can be included in the cost basis of any owner who can show their home directly benefits from the work.
How do I reach the IRS?
To find out more about how the IRS views condo association fees, look to IRS Publication 17, "Your Federal Income Tax," which includes a section on condos. Order a free copy by calling (800) TAX-FORM.
To reach the Internal Revenue Service, call (800) TAX-1040.