Tax Considerations
Tax Considerations
Where do I get information on IRS publications?
The Internal Revenue Service publishes a number of real estate
publications. They are listed by number but you should check with your
accountant or tax professional as tax laws have changed recently so there
may be some changes to the list below:
* 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?
As of Jan. 1, 1991, homeowners have been able to deduct points paid by the
seller. This deduction previously was reserved only for points actually
paid by the buyer. Check with your accountant or tax professional to see
if recent changes in the law have affected this deduction.
When is the best time to buy?
Here are some frequently cited reasons for buying a house:
* You need a tax break. The mortgage interest deduction can make home
ownership very appealing.
* You are not counting on price appreciation in the short term.
* You can afford the monthly payments.
* You plan to stay in the house long enough for the appreciation to cover
your transaction costs. The costs of buying and selling a home include
real estate commissions, lender fees and closing costs that can amount to
more than 10 percent of the sales price.
* You prefer to be an owner rather than a renter.
* You can handle the maintenance expenses and headaches.
* You are not greatly concerned by dips in home values.
What home-buying costs are 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 to
some extent - recent changes in the tax laws limit deductibility. 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,
which can total $2,000 or more, 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 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 may be tax deductible (check with your
accountant or tax professional as recent changes to tax laws may affect
deductibility), 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.
Resources:
* "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 $1 million used to be completely
deductible for the year in which you pay it to buy, build or improve your
principal residence plus a second home but the tax laws have changed so
seek advice from your accountant or tax professional.
* Points, or loan origination fees, also are deductible no matter who pays
them, the buyer or the seller.
* Most homeowners, except the wealthy and those living in high-priced
markets, no longer need to worry about capital gains taxes. The exemption
has been raised to $500,000 for married couples and $250,000 for single
owners. It can be taken every two years. 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 more information.
Resources:
* "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 may be deductible to some extent on a
second home if you itemize. Check with your accountant or tax adviser for
specifics.
Are points deductible?
If you are a buyer, and you or the seller pays points, they are deductible
for the year in which they are paid only. You also can deduct any points
you pay when you refinance your home, but you must do so ratably over the
life of the loan. Consult your tax or financial advisor.
How do you 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.
"For some people, owning a home is a great feeling," writes Mitchell A.
Levy in his book, "Home Ownership: The American Myth," Myth Breakers
Press, Cupertino, Calif.; 1993. "It does, however, have a price. Besides
the maintenance headache, the amount of after-tax money paid to the lender
is usually greater than the amount of money otherwise paid in rent," Levy
concludes. As for evaluating the risk associated with home ownership,
David T. Schumacher and Erik Page Bucy write in their book "The Buy &
Hold Real Estate Strategy," John Wiley & Sons, New York; 1992, that
"good property located in growth areas should be regarded as an investment
as opposed to a speculation or gamble." The authors recommend that
prospective buyers spend a few months investigating a community. Many
people make the mistake of buying in the wrong area. "Just because certain
properties are high-priced doesn't necessarily mean they have some
inherent advantage," the authors write. "One property may cost more than
another today, but will it still be worth more down the line?"
Are there tax credits for first-time home buyers?
Many city and county governments offer Mortgage Credit Certificate
programs, which allow first-time home buyers to take advantage of a
special federal income tax write-off, which makes qualifying for a
mortgage loan easier. Requirements vary from program to program. People
wanting to apply should contact their local housing or community
development office. Here is a list of four general requirements to keep in
mind:
* Some credit may be claimed only on your owner- occupied principal
residence.
*There are maximum income limits, which vary by locality and family size.
* You must be a first-time home buyer, which means you must not have had
any kind of ownership interest in a principal residence during the past
three years. This restriction may be waived, however, if you are buying
property within certain target areas.
* Allocations must be available. A local MCC program may have to decline
new applications when it runs out of funds.
Explain the home mortgage deduction . .
The mortgage interest deduction entitles you to deduct some of 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.
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.
How do I reach the IRS?
To reach the Internal Revenue Service, call (800) TAX-1040.