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Are points deductible?
ANSWER: 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.
Are seller-paid points deductible?
ANSWER: 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.
Are taxes on second homes deductible?
ANSWER: Mortgage
interest and property taxes are deductible on a second
home if you itemize. Check with your accountant or tax
adviser for specifics.
Are there tax credits for first-time home buyers?
ANSWER: 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:
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Some credit may be claimed only on your
owner-occupied principal residence.
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There are maximum income limits, which vary by
locality and family size.
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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.
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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 . .
ANSWER: 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?
ANSWER: 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 online to IRS Publication 17, "Your Federal Income
Tax," which includes a section on condos. Or order a
copy by calling (800) TAX-FORM.
How do I save on taxes?
ANSWER: Here are some
ways to save money on taxes:
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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.
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Points, or loan origination fees, also are
deductible no matter who pays them, the buyer or the
seller.
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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 or download from irs.gov.
How do you choose between buying and renting?
ANSWER: 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.
Should I buy a vacation home?
ANSWER: 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.
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What are the rules for mortgage credit certificates?
ANSWER: 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.
What home-buying costs are deductible?
ANSWER: 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?
ANSWER: 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.
When is the best time to buy?
ANSWER: Here are some
frequently cited reasons for buying a house:
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You
need a tax break. The mortgage interest deduction
can make
home ownership very appealing.
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You
are not counting on price appreciation in the short
term.
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You
can afford the monthly payments.
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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.
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You
prefer to be an owner rather than a renter.
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You
can handle the maintenance expenses and headaches.
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You
are not greatly concerned by dips in home values.
Where do I get information on IRS publications?
ANSWER: The Internal
Revenue Service publishes a number of real estate
publications. They are listed by number:
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