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YEAR END TAX TIPS
Year-end tax tips for your house
Here are some year-end tax tips. Invest in your IRA, open that Roth account, or buy
business or computer equipment to get that last-ditch deduction. But what about your
house? Luckily, there’s a lot that’s deductible when it comes to buying and selling a
home. If either scenario is on your wish list, these tips ensure that you and Uncle Sam are on good terms when April 15 rolls around.
When buying a home, what’s deductible?
Realtors are quick to point out that homeownership allows a lot of tax advantages not
available to someone who merely pays rent. A homeowner can deduct points used to
obtain a mortgage when buying a home, mortgage interest paid during the year and
property taxes.
Those are the nuts and bolts but, as with all taxes, there are these pesky rules and
guidelines for deductions. Your Realtor is a great source of information on the lay of the
land when it comes to taxes, but it’s wise to hire an accountant to help you wade
through the fine print.
Points
Most people get a mortgage when they buy a home. Mortgages have all kinds of costs,
including a loan origination fee. This fee is usually a percentage of the loan amount,
generally expressed as points. For example, one point on a $150,000 loan would be
$1,500. One and a half points on the same loan amount would be $2,250, and so on.
With VA and FHA loans, points are generally broken down into two categories: loan
origination fee (usually one point) and discount points (also a percentage of the loan
balance). Both of these fees are also deductible. One caveat: The loan origination fee
must be expressed as points for it to be tax deductible.
When you buy a home, points are deductible in the year they’re paid, providing they
meet certain conditions. The two main ones are that the mortgage is secured by the home you live in most of the time, and that you used this mortgage to either purchase or build your home.
Read the fine print and be sure your lender isn’t inflating the points to include other
items you would normally be charged. These would include such costs as appraisal fees, title insurance fees, property taxes, settlement fees and so on. If you’re not charged these fees but your "points" are higher than normal, it’s time to get out the magnifying glass.
Also, the cash you put into the sale must also exceed the amount charged in points. If
your points tallied $3,000, but you only had to put in $2,000 to close, that’s a red flag for
the fine folks at the IRS.
One more major condition is that the points must be clearly stated on your HUD-1
Settlement Statement. That’s the long document both you and the seller get after closing that clearly lays out all the costs involved in buying your home.
Deducting seller-paid points
When purchasing a home, sometimes the buyer negotiates for the seller to pay some
closing costs, including the points. Since the seller pays them and not the buyer, you
might assume they wouldn’t be deductible, but that would be a mistake.
Believe it or not, if the seller pays the buyer’s points, the IRS allows the buyer to deduct
them as an expense on federal tax returns. The catch is that the seller can’t also deduct
them. Paying the buyer’s closing costs, including points, merely reduces the net gain on
the home for purposes in calculating capital gains taxes (which are usually deferred).
Second homes and points
Points paid to finance the purchase of a second home must be deducted over the life of
the loan, not in the year in which they are paid. Also, if you make too much money,
there are limits to your deductions, so be sure to check with your accountant.
Other deductible closing costs
With two exceptions, other closing costs are not deductible. Those exceptions are prepaid interest and pro-rated property taxes. Since interest is a deductible expense, prepaid interest is deductible. With property taxes, the seller’s last property tax payment may have covered part of the time where you’re the owner of the home. The settlement agent will calculate how much of that last bill you should pay and charge it to you as a closing cost (usually listed as pro-rated property taxes), and that’s also deductible.
The amount you’ll pay in property taxes is based on an assessment of the value of your
house. Generally, tax assessments are adjusted on an annual basis and any changes are mailed to you. It’s a good idea to keep a close watch on the assessment value, since the amount of money that comes out of your pocket is directly tied to it. A large jump in your assessment could be a reflection of a rise in market values in your neighborhood, but it might very well be an error. Keep tabs on what houses are selling for in your area and compare your assessment to the average sold price (using houses similar to yours in size and condition).
All it takes is a little advance planning, and you’ll be relaxed by the time April 15 arrives.
Hope these tips are helpful!
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