Tax deduction tied to purchase of a home vary


September 25, 1994|By Dian Hymer

What expenses associated with buying and owning a home are tax deductible?

With certain limitations, the property taxes and mortgage interest you pay on a personal residence are deductible from your income tax in the year in which they were paid.

Some of the costs associated with home buying (called closing costs) are tax deductible. For example, the loan origination fee (called "points") is considered prepaid interest by the IRS and is deductible in the year you purchase the house. Since 1 point is equal to 1 percent of the loan amount, this can add up to a sizable tax deduction.

The proration of interest that is paid to the lender at closing is also tax deductible in the year of purchase. Lenders collect enough money at closing to cover the interest owed from the closing date until the next payment period. This is called proration of interest. Make sure that you keep a record of this figure. At the end of the year, the lender will send you a 1099 form (for your income tax filing) which indicates the amount of interest you paid for the year. This 1099 form might not include the proration of interest you paid at closing.

Many of your closing costs can't be deducted immediately, but they can be taken into account when you sell. Such costs include transfer taxes, title insurance, inspection fees, appraisal and credit fees, attorney's fees, and notary and recording fees. These costs can be used to offset some of your capital gain tax liability.

While the costs of maintaining a house are not tax deductible, the cost of capital improvements made to the property can be used to offset capital gain tax when you sell. It's not always clear what is, and is not, a capital improvement, so consult a tax adviser if you have a question. Keep good records in case you need to substantiate calculations.

The costs of selling a home can be used to adjust your capital gain tax liability. In addition, if you buy another personal residence within 24 months of selling the old one, you can avoid paying any capital gain tax at that time, if the new house is equal in price to the old one, or if it's more expensive.

FIRST-TIME TIP: A buyer can deduct points paid at the time of purchase, even if the seller paid them. If you bought a house after Dec. 31, 1990, and the seller paid points for you that you didn't deduct, you may be entitled to an unexpected refund. If you qualify for such a refund, file an amended return on Form 1040X, which you can get from your local IRS office. Write "seller-paid points" in the top right-hand corner of the form and attach a copy of your closing settlement sheet (called a "HUD-1").

Be aware that if you deduct seller-paid points now, you will need to adjust your capital gain accordingly when you sell. So if you paid $100,000 for a house and the seller paid $5,000 in points which you are going to deduct now, the IRS will calculate your capital gain when you sell based on a $95,000.

Dian Hymer's column is syndicated through Inman News Features. Send questions and comments care of Inman News Features, 5335 College Avenue, No. 25, Oakland, Calif. 94618.

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