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As tax season moves into full swing, realtors are quick to point out that home ownership 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 basics.

There are rules and guidelines to these deductions, however. Even though we have the best intentions, sometimes we’re a little “fuzzy” about exactly what is deductible. RealEstateABC.com offers us some clarifying points about what is in fact tax deductible to help cure homeowner’s confusion.

What are Points?

When most people buy a home, they generally obtain a mortgage. Mortgages have costs and one of those costs is the “loan origination fee.” The loan origination fee is usually a percentage of the loan amount, generally expressed as “points.”

For example, one “point” on a $150,000 loan would be $1500. One and a half points on the same loan amount would be $2250.

On VA and FHA loans, points are often broken down into two categories: loan origination fee (which is usually one point) and discount points (which are also a percentage of the loan balance). Both are deductible.

The loan origination fee must be expressed as points in order for it to be tax deductible.

Deducting Points when Buying a Home

When buying a home, points are deductible in the year they are paid, providing they meet certain conditions. The main conditions 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.

However, there are other conditions.

Your lender cannot inflate the points to include other items you would normally be charged. When buying a home, there are normally other charges such as appraisal fee, title insurance fee, property taxes, settlement fees, and so on. If by some miracle you are not charged these fees but your “points” are higher than normal…

In that case you can’t deduct the points. Sorry.

The cash you put into the deal must also exceed the amount charged in points. In other words, if your points were $3000, but you only had to put in $2000 to close, the IRS knows something is up. Your lender is inflating your loan amount to cover your points. Although a lender can technically do this, you wouldn’t be allowed to deduct the points.

The only other major condition is that the points must be clearly stated on the HUD1 Settlement Statement. This is a document you receive after closing that clearly lays out all the costs involved in buying the home. The seller also receives a HUD1.

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, one would assume they could not be deductible, right?

Wrong.

If the seller pays the buyer’s points, the Internal Revenue Service allows the buyer to deduct this as an expense on their federal tax returns. However, the seller cannot deduct them, too. 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).

Deducting Points on Second Homes

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.

If You Make Too Much Money…

If you make too much money, there are limits on what you can deduct, and for that you should see a Certified Public Accountant. In the year 2000, if your “adjusted gross income” was over $128,950 there is a limit placed on what can be deducted. For married couples filing separately, the figure is half that.

Other Deductible Closing Costs

With two exceptions, other closing costs are not deductible. Those exceptions are pre-paid interest and pro-rated property taxes.

When you buy a home, you may close on any day of the month. However, most lenders want their mortgage payment due on the first of each month. So if you close on the 20th, for example, you “pre-pay” ten days of interest as part of your closing costs. The ten days of interest pays you up to the end of the month. Your first mortgage payment will not be on the first of the following month, but the month after that. Unlike renting, where you pay in advance, mortgages are paid in arrears.

Since interest is a deductible expense, prepaid interest is also deductible.

A similar thing happens with property taxes. The seller’s last property tax payment may have covered part of the time where you will actually be 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 called “pro-rated property taxes.” This is also deductible.

Certified Public Accountants

Whenever you reach a point where you begin itemizing deductions, it is best to have your tax returns prepared by a Certified Public Accountant. Internal Revenue Service rules and regulations can quickly become…confusing.

Hello everybody!  And thank you for checking out our blog 🙂 

While we know that while our readers tend to be web-savvy individuals (many spending a LOT of time online) and that most are interested in real estate on some level, we also understand that that’s not all that you are….

You’re human. You’re interested in more than just the buying and selling of homes. And sometimes you probably get sick of spending so much time with your eyes glued to your computer screen.

So we’ve decided to take a stand and try something crazy starting today….

We’re bringing print back!    (the crowd oooohs and aaaahs)

Beginning today, we’re going to post a weekly Trend Report that covers a range of topics from helpful home tips to technology trends to miscellaneous market facts and everything in between. It’s in PDF format, so you can save it, print it, hang it on your refrigerator or in your cubicle, make a paper airplane out of it, recycle it, pass it along, and read whenever you feel like it…..perhaps first thing in the morning over a cup of coffee, in the loo, or during your commute home – if you’re not driving that is 🙂

If nothing else, I at least hope you check it out for a few weeks, you’re bound to find some new service or great tip that you can use yourself…….or that you can pass off as your own idea during some random conversation with your boss at the holiday party in order to seal the deal on that next promotion. We promise we won’t tell 🙂

So without further ado, here is the first of our weekly Trend Reports……

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…. and be sure to feel free to post or contact us directly with any feedback or suggestions you have.

Thanks!!! 

For this year’s Best Places to Live: Top 100 list, CNN’s Money Magazine focused on smaller places that have everything any family could want – the best combination of economic opportunity, good schools, safe streets, things to do and a real sense of community.

And the winners for 2007 are…

1. Middleton, WI      

2. Hanover, NH  

3. Louisville, CO              

4. Lake Mary, FL              

5. Claremont, CA           

6. Papillion, NE

7. Milton, MA

8. Chaska, MN

9. Nether Providence, PA

10. Suwanee, GA

So if you’re thinking about moving or already on the hunt for a new place to call home in Minnesota, Chaska is apparently a good bet… CNN put their Money on it 😉

For those of you who are looking to turn lemons into lemonade in the forclosure market, here are several links to free websites for locating foreclosed properties:

General Services Administration (GSA)

www.auctionrp.com/auctions2/

Department of Treasury- Internal Revenue Service

www.treas.gov/auctions/irs/cat_Real7.htm

Housing and Urban Development (HUD)

www.hud.gov/homes/

Homes for Sale by the U.S. Government

www.homesales.gov/homesales/mainAction.do

U.S.D.A.

www.resales.usda.gov/

FDIC

www.fdic.gov/buying/owned/index.htm

And if you’re looking for real estate in the Twin Cities metro area of Minnesota, please call The Don Edam Group – Owner Options Realty at (952) 486-7584.