One of the few remaining deductions we have on federal tax returns are real estate related. Don’t miss out on this opportunity!!!
For tax purposes, deductions for residential real estate held for personal use generally fall into two main categories:
1) Costs that can be deducted as expenses from a buyer’s or seller’s personal income on a tax return
2) Costs that can be used to alter the basis of the home, with the idea of lowering the capital gains
Deductions When You Buy
Buyers may deduct the following items associated with buying a home as expenses on their personal income tax in the year that they buy the home.
1. Points—including loan origination fees and loan discounts, provided:
- The home is your principal residence
- The amount is clearly stated on the settlement statement, and
- The purchase meets the nine criteria for deducting oints established by the IRS
2. Pro-rated real estate taxes collected on the settlement statement (not for lender escrow account)
Not Deductible When You Buy
Buyers cannot deduct as expenses on their income tax or add to the cost basis of the
1. Fees for an appraisal required by the lender
2. Rent paid to occupy the home before closing
3. Cost of credit reports
4. Loan assumption fees
Add to Cost Basis
Buyers may add the following costs associated with a purchase to the basis of their home. These additions will increase the basis and serve to lower the capital gains liability when the home is eventually sold:
1. Transfer or stamp taxes and recording fees, if paid by the buyer
2. Title abstracts
3. Title insurance
4. Attorney’s fees for preparing their documents for closing
During the period of homeownership, owners of single-family homes, condominiums,coops, and other types of property occupied as a principal residence may deduct the following items as expenses each year on their income tax returns:
1. Interest paid on a mortgage loan(s) of $1 million or less taken out to buy, build, or improve a home. If the loan amounts you owe on your first and second home together exceed $1 million, not all interest is deductible. Note that married couples filing separately may each deduct interest on a total mortgage debt of $500,000.
2. Late payment charges on mortgage payments may be deductible
3. Private mortgage insurance may be deductible – check tax advisor for limitations
4. Real estate taxes paid on the home in
5. Any applicable tax credits
Homeowners may not deduct the following items as expenses each year on their income tax returns:
1. Homeowners association dues or assessments.
2. Premiums for fire or homeowners' insurance. (Note that this is often included in the monthly house payment.)
At the time of the sale, the sellers may deduct these expenses from their income taxes:
1. Any reserved real estate taxes credited to the buyer at closing. However, these deductions can't be taken until the year that the property taxes are actually paid to the taxing body.
2. Any mortgage interest paid for the portion of the year that the house was owned.
3. Any remaining, not-deducted points for the satisfied mortgage.
Add to Cost Basis
In calculating the capital gains resulting from a sale, the sellers may add the costs following items to their existing basis:
1. Transfer or stamp taxes and recording fees, if paid by the seller
2. Recording fees, if paid by the seller
3. Attorney’s fees for preparing their documents for closing
4. Real estate commissions paid to a broker
5. Contributions to buyer’s closing costs
6. Money spent to repair the house prior to sale, if spent within 90 days of the sale
7. Improvements that have added to the value, prolonged useful life or adapted it to new uses – check www.irs.gov or your tax advisor
**My expertise is REAL ESTATE, not taxes! Always consult an accountant or tax attorney with
questions on real estate tax issues. This serves only as a guideline. Tax laws change frequently.