The end of a year means it's time for tax planning

December 27, 1992|By Andree Brooks | Andree Brooks,New York Times News Service

At the close of the calendar year, along with partying and Santa Claus, comes the need for tax planning. For anyone who owns a home this means finding out about the tax deductions that might be available for use on the 1992 income tax return and doing something about those items that may need attention before year-end.

These can differ from year to year, as much as a result of changing personal circumstances as of alterations in the tax code. For one, "We've had a lot more people who became landlords for the first time because they couldn't sell," said Timothy Morse, a tax manager for KPMG Peat Marwick, the national accounting firm. And that change alone makes a dramatic difference in the tax status of property.

Martin M. Shenkman, a tax attorney in Manhattan, recommends starting by separating any bills, receipts or canceled checks for any improvements made during the year, putting them in an envelope with the year noted on the front and adding this to any existing folder containing documents connected with the property.

When a home is sold, the seller's accountant seeks the full "cost basis" to help minimize taxes due on the profits (if the gains cannot be deferred). The cost basis may include all subsequent improvements in addition to the original purchase price.

Because improvements may have been made over time -- new wiring here, a built-in bookcase there -- they are not easily documented, or even recalled, unless those papers are separately filed, Mr, Shenkman said.

William J. Greenberg, a certified public accountant in Manhattan whose practice is limited to co-ops and condominiums, reminds owners of these units that they can include as an improvement any special assessment levied to improve common areas such as a roof or lobby. However, an assessment used to make up a shortfall in cash flow -- perhaps because a growing number of owners have been delinquent in paying their common charges -- cannot be added to the cost basis.

Any home improvements that are being financed generate a more immediate tax benefit. Even though it's now common knowledge that the origination fees -- points charges -- connected with refinancing a mortgage are not fully tax deductible in the year in which they are incurred, this is not true of any additional mortgage financing being taken out for home improvements.

Mr. Shenkman provided the following example. Say, for example, acouple had an outstanding mortgage balance of $90,000. They decided to increase the loan balance to $120,000 to cover the $30,000 cost of a new kitchen -- a typical move in 1992 since the low interest rates made it possible to do so without sharply higher monthly payments. Points charges on the transaction came to $2,400.

The points charges directly applicable to the $30,000 being used for the improvements ($600) would be tax deductible. The tax deduction for the remaining fees would have to be amortized over the life of the loan.

Anyone who rented out a home during the year because he couldn't sell it should be aware that all expenses connected with its ownership and operation are now tax deductible as a $H business expense, said Mr. Morse. Under such circumstances even condominium common charges, formerly nondeductible, can be factored in. So can the full cost of co-op maintenance charges.

Anyone who might have lost a job during the year and who has since used part of the home as a home-based office should brush up on the tax benefits of doing so.

These benefits are now more easily calculated and identified as a result of a form (Form 8829) the IRS introduced last year. Its stated aim is to help the homeowner make the correct calculations, although critics say its goal was also to prevent abuses through more detailed reporting requirements.

Getting a copy of this form early in the season, either through an accountant, an office supply store or the IRS itself (listed in the Blue Pages), should help the new home-office user better understand the regulations and gather the documents and data.

If, on the other hand, a personal residence is about to be sold in 1993 and was being used as a home office, it might be better to disqualify the office by introducing domestic activities in the year of sale, such as a child's toy box, said Julian Block, a tax attorney in Larchmont, N.Y., and author of "The Homeowner's Tax Guide," available for $14.95 from Runzheimer International by calling (800) 942-9949.

If it remains a qualified office at the time of sale, noted Mr. Block, the taxes due on any profits attributable to that portion of the home -- say, 20 percent -- could no longer be rolled over into another residence. Instead, they would have to be paid immediately.

Thus, for example, if the sale generated a profit of $100,000, the ++ disqualification could add a tax bill of $5,600 (20 percent of $100,000 x 28 percent) to any income taxes due, plus state of local levies.

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