Tax Considerations (Check with your tax advisor) - Q & A
Q: What is the Mortgage Credit Certificate program?
A: For first-time home buyers, the Mortgage Credit Certificate Program, allows them to take advantage of a special federal income tax credit. Buyers are allowed credit in qualifying for the tax advantage with this particualr program, which they will receive after they purchase the home.
To verify if your community has an MCC program, contact your local housing or redevelopment agency. You also may inquire with the local association of REALTORS® or with your real estate broker.
The amount of the credit is tied to a local formula which every city that has an MCC program must follow. MCC credit, which totals $2,000 or more, reduces the borrower's federal tax liability by an amount tied to how much the borrower pays in annual mortgage interest. The borrower's income as well as the purchase price of the home have to fall within the established guidelines.
Q: Can I deduct the property taxes on my second home?
A: The only way to deduct the interest and property taxes on your second home is if you itemize. Contact your tax adviser or accountant for specifics.
Q: Which home-buying costs are deductible?
A: When it comes to property taxes and interest they are deductible every year. Any points you pay or the seller pays for your home loan are deductible for that year.
Closing costs, however, are not immediately tax-deductible. When you go to sell, the closing costs are figured into the adjusted cost basis of your home. Any significant home improvements will also be calculated into your basis.
Included in these fees are title insurance, loan application fees, credit report, appraisal fees, service fees, closing or settlement fees, bank attorney fees, attorney fees, document preparation fees and recording fees.
Q: How does one choose between buying or renting?
A: One advantage you have, if you choose to rent, is that you do not have to worry about maintenance or any other financial obligations that are associated with the property. Unlike renters, home ownership offers you the freedom to make all decisions in regards to your home. The tax benefits are a plus too.
There are a vast amount of economic considerations as well. Home owners, who secure a fixed-rate loan, are granted the ability to lock in their monthly housing costs. This option allows them to make prudent investment plans for they know that housing expenses will not increase substantially. Renters are not given this option.
Substantial profits can be yielded on home ownership for it is a highly leveraged investment. The return on your investment, however, solely depends on the home-price appreciation.
Mitchell A. Levy states, "For some people, owning a home is a great feeling," in his book, "Home Ownership: The American Myth," Myth Breakers Press, Cupertino, Calif.; 1993.
Levy concludes, "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.”
David T. Schumacher and Erik Page Bucy write in their book in response to the risk associated with home ownership, "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."
Prospective buyers were recommended by the authors to spend a few months investigating the community before buying. Otherwise you may become one of the many people who made the mistake of buying into 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 the line?"
Q: Explain the home mortgage deduction
A: You are entitled to completely deduct the interest on your home loan for the year in which you paid it with the mortgage interest deduction. In order to do this, you need to itemize your deductions, which means, that your total deductions must surpass the standard deduction of the IRS.
The amount of interest on your loan goes down each year that you pay on your mortgage, it's important to make note of that. All standard home-loan formulas pay off interest first before significantly paying into principal. If you pay a bit extra on your principal every year will help you get your loan paid off early.
Q: Should I invest in a vacation home?
A: Vacation homes can either be purchased for mere enjoyment or for investment purposes. Tax benefits may come into play but contact your tax professional for specifics.
Some purchase vacation homes with intentions of turning them into permanent retirement homes for future use, which puts them way ahead on their payments.
The interest and property taxes on vacation homes are tax deductible. A benefit, which helps offset the cost of paying for a second home. If you live in your vacation home for less than 14 days a year, it may become depreciated.
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: Do first-time home buyers get tax credits?
A: Mortgage Credit Certificate programs are offered in many city and county governments. This program gives first-time home buyers the advantage of a special federal income tax write-off. It also makes qualifying for a mortgage loan all the more easier.
From program to program requirements may vary. For those who wish to apply should contact their local community development or housing office.
Some requirements to keep in mind are:
*Some credit may be claimed only on your owner-occupied principal residence.
*There are maximum income limits, which vary by locality and family size.
* 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.
* Allocations must be available. A local MCC program may have to decline new applications when it runs out of funds.
Q: Are homeowners able to deduct points paid by the seller?
A: Previously, this deduction was reserved strictly for points paid by the buyer. However, as of Jan. 1,1991, homeowners are now able to deduc points paid by the seller.
Q: Can you deduct the cost of home improvements in Houston, TX?
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. Make certain you check with your tax professional.
Q: How am I able to save on taxes?
A: Below is a list of ways in order for you to save money on taxes:
* Mortgage interest on loans up to $1 million are completely deductible for the year in which you pay it to buy, build or improve your principal residence plus a second home.
* Points, or loan origination fees, are also deductible no matter who pays them, the buyer or the seller.
* Most homeowners, except the wealthy and those living in high-priced markets, no longer need to worry about capital gains taxes. For married couples the exemption has been raised to $500,000 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.
Q: Why should I consider buying a house?
A: Here is a list of frequently cited reasons for buying a house:
*A tax break is needed. The mortgage interest deduction makes home ownership more appealing.
* You are not counting on price appreciation in the short term.
* You can afford the monthly payments.
* 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.
* You prefer to be an owner rather than a renter.
* You are capable of handling the maintenance expenses and headaches.
* You are not greatly concerned by dips in home values.
Q: Are there rules when applying for mortgage credit certificates?
A: In order to qualify for a mortgage credit certificate, the purchase price of your home and your income must fall within the established city guidelines. These guidelines vary from city to city, but generally, those who earn an average or slightly higher than average income are permitted.
The number of cities who have authorized the MCC program is limited. Contact your municipal housing department for more information.
Q: Are buyer/seller points deductible?
A: For the year in which they are paid, yes, points paid by the buyer or the seller are deductible.
Q: What are the rules on capital gains when inheriting a house in Houston, TX?
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 Houston, Texas home?
A: The IRS allows no deductions for losses on the sale of your own home. There's no way to use a loss to your advantage on your income tax return. It won't matter what type of misfortune you may have run into, write Edith Lank and Miriam Geisman in Your Home as a Tax Shelter, Dearborn Financial Publishing, Chicago; 1993.
Q: How do I obtain more information on IRS publications?
A: A number of real estate publications are published by the Internal Revenue Service. Below 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 contact the IRS?
A: To reach the Internal Revenue Service, call (800) TAX-1040.
Q: In a homeowners association, how are fees and assessments figured in?
A: Homeowners association fees are not tax-deductible for they are considered personal living expenses, however, if an association has a special assessment to make capital improvements, the condo owners may be granted the opportunity to add the expense to their cost basis.
Money that an owner spends for permanent improvements, throughout their time within the home, is called cost basis. Cost basis is also used when the property is sold for it helps reduce eventual capital gains taxes.
If the association, for example, installs a new roof on a building, the expense is considered part of the condo owner's cost basis only if they lived directly underneath it.
Swimming pool installation or other improvements to common areas are considered on a case-by-case basis, however, if the owner is able to reveal their home benefits from the work done, then it can be included into the cost basis. Check with your real estate tax professional for further information.
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.
