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Tax Considerations (Check with your tax advisor) – Q & A
Q: Are taxes on second homes deductible?
A: Interest and property taxes may be deductible on a second home if you itemize. Check with your accountant or tax adviser for specifics.
Q: What home-buying costs are deductible?
A: Any points you or the seller pay for 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.
Q: Explain the home mortgage deduction?
A: The mortgage interest deduction entitles you to completely deduct the interest on your home loan for the year in which you paid it. 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.
Q: Should I buy a vacation home?
A: Today a vacation home may be purchased for investment purposes as well as enjoyment. And yes, there may be tax benefits, but check with your tax professional.
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 less than 14 days a year.
Resources:
* “Real Estate Investing From A to Z,” William Pivar, Probus Publishing, Chicago; 1993.
* “The Ultimate Language of Real Estate,” John Reilly, Dearborn Financial Publishing, Chicago; 1993.
Q: Can you deduct the cost of home improvements?
A: What you spend on permanent home improvements, such as new windows, can be added into your home’s cost basis, or amount of money invested in a home, which reduces capital gains when it comes time to sell. Capital gains are determined by the difference in price from the time a home is purchased and the time it is sold, minus the cost of any permanent improvements.
However, the 1997 tax changes virtually eliminates the capital gains tax for most homeowners. The exemption is $250,000 for single homeowners and $500,000 for married homeowners. Make certain you check with your tax professional.
Still, it is worthwhile to save all receipts for permanent home improvements just in case. They also can be useful documentation when it comes to marketing your home when you sell. Please check with your tax professional to make certain.
Q: How do I save on taxes?
A: Here are some ways to save money on taxes:
* Mortgage interest on loans up to $1 million 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.
* 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.
Q: What are the rules on capital gains when inheriting a house?
A: When children inherit a home, the Internal Revenue Service determines their basis in the property on the date of the person’s death. The cost basis is not the amount the owner originally paid for the house. It is the property’s fair market value on the date of the mother’s death, says Pamela MacLean, assistant public affairs officer with the IRS.
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. Assume the property was divided up equally. If one of the three siblings sold her share, she must pay capital gains tax for whatever profit she made over one-third of the new basis, MacLean said.
Other tax consequences include estate taxes. However, the estate must total $600,000 or more before tax issues become a concern. The IRS allow residents to pass on property, cash and other assets worth up to a total of $600,000 before charging the heirs any taxes, according to MacLean.
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. Other resources: IRS Publication 448, “Federal Estate and Gift Taxes.” Order by calling 1-800-TAX-FORM.
Q: Can I deduct the loss I suffered when I sold my home?
A: The IRS allows no deductions for losses on the sale of your own home. There’s no way to use a loss to your advantage on your income tax return. It won’t matter what type of misfortune you may have run into, write Edith Lank and Miriam Geisman in Your Home as a Tax Shelter, Dearborn Financial Publishing, Chicago; 1993.
Q: Are points deductible?
A: Points paid by the buyer or the seller are deductible for the year in which they are paid.
Q: Where do I get information on IRS publications?
A: 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.
Q: How do I reach the IRS?
A: To reach the Internal Revenue Service, call (800) TAX-1040.
Q: What tax benefits are there to homeowners?
A: 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.
Property taxes on all real estate, including those levied by state and local governments and school districts, are fully deductible against current income, say Lank and Geisman.
“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.
Some moving expenses are deductible for people who changed jobs and relocated as a result. The IRS requires that the new employment be located at least 50 miles away, among other considerations, said Analisa Collins-Sears, a public affairs officer with the IRS’ Bay Area office.
Resources: * “Tax Information for First-Time Homeowners,” a free guide published by the Internal Revenue Service. Order by calling 1-800-TAX-FORM.
Q: How are fees and assessments figured in a homeowners association?
A: 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. Check with your real estate tax professional.
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.
Q: Are the costs of a natural disaster deductible?
A: Damage, destruction or loss of property from fires, floods, earthquakes and other disasters are 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.
Losses on the sale of your own home are not deductible, through they are deductible for rental properties.
Copyright 1999 Inman News Features