(Part 2)
POINTS
TAX FACTS: There are deductible expenses for home buyers, which include settlement charges for points. The points paid by either the buyer or the seller is deductible by the buyer in the year when he or she made the home purchase. The deductible points are upfront charges for using money, and not services. One percent of the loan amount equals one point. Some closing service fees are quoted as “points” but are not deductible.
When refinancing your home, you may not deduct paid discount points in full during the tax-year of the refinancing but you must prorate the deduction over the life of the loan. For example, $3,000 in points paid for a refinanced loan with a 15-year-term would have a deduction of $200 ($3,000 divided by 15 = $200) per year. But if the home is sold before the end of the loan term or refinanced by another lender, all remaining points can be deducted on that year’s return.
HELPFUL HINT: To increase your tax deduction, let the sellers pay for as many points as possible.
EQUITY LOANS
TAX FACTS: Regardless of how you use the loan proceeds, the interest paid on home equity loans (which included second mortgages, equity credit lines or some refinancing) is fully deductible up to $100,000. If you use some or all of the proceeds for home improvements, the amount can be added to the $100,000 limit, which applies as long as all the debts secured by the residence does not exceed the home’s fair market value. If you made home improvements, make sure to document all the cost.
HELPFUL HINT: It makes tax sense for some homeowners to pay off the interests paid on credit cards and other “consumer” loans like car loans using a home equity credit line or loan because it is not deductible. However, Alternative Minimum Tax rules may apply.
(Note: Some state laws restrict home equity loans so better consult your tax advisor for details).
DEPRECIATION
TAX FACTS: You can increase your capital gain (and tax liability) if you take depreciation on property — whether a principal residence, rental property or second home – upon sale. But the tax treatment on depreciation claimed on real property varies, depending on whether the depreciation was taken before or after May 6, 1997.
HELPFUL HINT: Taxation of real-property depreciation is a complicated subject. For detailed information, consult IRS Publication 523 “Selling Your Home” (available online at www.IRS.gov) or contact a tax professional.
MOVING
TAX FACTS: You may qualify for a moving expense deduction if you moved to a new home because of a new job or a job transfer. However, there is a distance limit for this, which does not include the location of the new home. The distance between the old home and the new job must be at least 50 miles more than the distance between the old home and the old job. For example, if your old office was located 15 miles from your old home, your new office must be at least 65 miles from your old home (50 + 15 = 65).
HELPFUL HINT: You can deduct the cost of moving your household goods and the direct cost of moving your family, regardless if you are a homeowner or just a renter. You can also deduct the expenses incurred for lodging during the move. But this does not include the meals.
HOME OFFICE
TAX FACTS: Some common home-office expenses like utilities, insurance, repairs, cleaning and depreciation may qualify for a deduction even if you do the actual work in another location. Just make sure to keep all the records. However, any depreciation claimed after May 6,1997 will be given a 25% tax if the residence is sold for a gain, regardless if the property has been converted into personal use or not.
HELPFUL HINT: It cannot be claimed on the tax return if you (or your family) use your home office for non-business purposes. The space must be used exclusively for business purposes for you to claim home-office deductions.
DISASTERS
TAX FACTS: If an accident, storm, fire, flood, drought or other unforeseen occurrence in 2011 resulted to losing your property, you don’t need to report the insurance proceeds if you use it to replace the property within a specified time. You can claim the loss on your tax return in the year when the property was lost (2011) or for the preceding year if the home was located in a federally-declared disaster area.
HELPFUL HINT: Local and state property taxes may also be abated in some cases. To find out more, consult IRS Publication 547 “Casualties, Disasters, and Thefts.”
ENERG Y TAX CREDIT
TAX FACTS: You can deduct in your tax return 30% of the cost you incurred if you installed a geothermal heat pump, solar panels or water heaters, small wind energy systems or fuel cells in 2011 in your principal residence. These energy credits continue with no cap until 2016 and are valid for new construction or existing homes. However, energy-efficiency restrictions apply.
You may also qualify for up to 10% in tax credits from the total cost of other types of energy-efficient improvements that you made in 2011.
In 2011, the maximum credit is $500 while only $200 of the credit can be taken from installing new windows. But you can no longer claim additional tax credits if you have already claimed $500 or more in energy-efficiency tax credits from 2006 to 2010. However, the improvements you made must meet energy-efficiency criteria.
HELPFUL HINT: If you qualify for energy tax credits, you may claim them regardless if you itemize deductions or not. To claim these credits, use Form 5695.
LOCAL TAXES
TAX FACTS: Real estate property taxes, state and local income, and personal property taxes are fully deductible.
HELPFUL HINT: If you sold or bought a property during the year, you may have paid or have been refunded of real estate taxes without knowing it. See your closing statement for any proration.
VACATION HOMES
TAX FACTS: Separate tax rules apply to vacation homes, which vary according to the owner’s personal-use days.
It is referred to as vacation home if a residence is used by the owners for more than 14 days or 10% of the days it was rented during the year (if rented for more than 140 days). All mortgage interest and property taxes are usually deductible for a vacation home, either as rent expenses or as additional itemized deductions.
Other property expenses may be deductible, like depreciation, if there was rent income.
HELPFUL HINT: You can claim for rent expense deductions, aside from interest and taxes, for non-vacation rental homes even if this results in a loss. If you use your vacation home for personal reasons, the deductions are determined by allocating expenses, which included interest and taxes, between the rental and the periods of personal-use. But you do not have to pay taxes on the rent income if you rent your vacation home (or principal residence) for 14 days or less a year.