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©
2002 Ruth E. Campbell. |
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Frequently Asked Questions Owning
Your Home - Q & A Q: Are taxes on second homes deductible?
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 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 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.). 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. Q: How do I save on taxes?
A: Here are some ways to save money on taxes:
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?
Q: Are points deductible?
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?
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. 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. |