Buying Your Home - Tax Considerations
Where do I get information on IRS publications?
Are seller-paid points deductible?
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.
When is the best time to buy?
Here are some frequently cited reasons for buying a house:
What home-buying costs are deductible?
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?
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.
What are the rules for mortgage credit certificates?
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.
Should I buy a vacation home?
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.
How do I save on taxes?
Are taxes on second homes deductible?
"For some people, owning a home is a great feeling," writes Mitchell A. Levy
in his book, "Home Ownership: The American Myth," Myth Breakers Press,
Cupertino, Calif.; 1993. "It does, however, have a price. Besides the
maintenance headache, the amount of after-tax money paid to the lender is
usually greater than the amount of money otherwise paid in rent," Levy
concludes. As for evaluating the risk associated with home ownership, David T.
Schumacher and Erik Page Bucy write in their book "The Buy & Hold Real
Estate Strategy," John Wiley & Sons, New York; 1992, that "good property
located in growth areas should be regarded as an investment as opposed to a
speculation or gamble." The authors recommend that prospective buyers spend a
few months investigating a community. Many people make the mistake of buying in
the wrong area. "Just because certain properties are high-priced doesn't
necessarily mean they have some inherent advantage," the authors write. "One
property may cost more than another today, but will it still be worth more down
Explain the home mortgage deduction . .
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
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.
How do I reach the IRS?