Monday, February 27, 2006
Realty Tax Tips
CHECKLIST OF THE TEN MOST OFTEN OVERLOOKED REAL ESTATE TAX DEDUCTIONS
These are the highlights taken from a publication written by Robert Bruss and reprinted in an article in Inman News, March 3rd, 2006.
1) Home acquisition mortgage loan fees: If you bought your primary or secondary home last year, you probably obtained a mortgage to finance and purchase. That mortgage is called “acquisition mortgage” because it enabled purchase of the residence. If you paid a loan fee to obtain the acquisition mortgage, usually called “points,” that loan fee qualifies as an itemized interest deduction. Each Point equals 1% of the amount borrowed.
2) Home improvement loan fees: If you paid a loan fee to obtain a home improvement loan, that loan fee is fully deductible in the tax year it was paid.
3) Loan fees paid to refinance a home loan or borrow against other real estate: If you refinanced your existing home loan last year, or borrowed against other real estate such as an apartment building, any loan fee you paid must be deducted over the life of the mortgage; i.e., if you paid a $1,000 loan fee to refinance with a new 30-year home mortgage, you can deduct $33.33 for each of the next 30 years.
4) When refinancing, deduct any undeducted loan fees: Thanks to low mortgage interest rates, many home owners refinanced again last year after previously refinancing a year or two earlier. These home owners should remember to deduct on last year’s income tax returns any undeducted loans fees from prior mortgage refinance.
5) If you bought or sold property last year, remember to deduct prorated real estate taxes: A major tax deduction many real estate buyers and sellers overlook is the prorated property tax they paid at the close of the escrow. Even if the other party remitted the payment to the tax collector, but you were charged a prorated portion of the tax bill, be sure to deduct your share on your last year’s return.
6) Deduct prorated mortgage interest in the year of property purchase or sale: Similarly, if you bought a residence (or other real estate) and took over an existing mortgage, don’t forget to deduct your prorated interest share for the month of the sale ( even if the seller makes the payment to the lender). Your closing settlement shows your prorated share of mortgage interest.
7) Mortgage prepayment penalty: If you paid off an existing mortgage early and were charged a prepayment penalty by the lender, that prepayment qualified as an itemized deduction.
8) When land rent payments qualify as interest deductions: Millions of homes are located on leased land an Internal Revenue Code 163(c) allows land rent to be deducted like interest when the lease: (a) is for at least 15 years, including renewal periods; (b) is freely assignable; (c) contains a present or future option to buy the land; and (d) is like a security interest, such as a mortgage. Of course payments to buy the land are not deductible, nor are ground rent payments deductible if you do not have the option to buy the land, such as in a mobile home park.
9) Home construction loan interest: If you built a new home last year, or are building one now, don’t forget to deduct the construction loan interest paid. It’s deductible if the construction period does not exceed 24 months before occupancy of your principle residence.
10) Deduct prepaid property taxes and mortgage interest: If you prepaid this year’s real estate taxes last year, as home owners do to increase their tax deductions, or if you paid your January of this year mortgage payment in December of last year, don’t forget to deduct these extra mortgage interest and property tax payments on last year’s income tax returns.
**For a more comprehensive understanding of the legal/tax consequences, we strongly suggest your contacting an attorney and/or CPA for specific advice on the matters stated herein.
Compliments of Lorrie Williams and Gabriela Frey, Financial Title located in Albany, California. Lorrie can be reached at; lawilliams@financialtitle.com.
These are the highlights taken from a publication written by Robert Bruss and reprinted in an article in Inman News, March 3rd, 2006.
1) Home acquisition mortgage loan fees: If you bought your primary or secondary home last year, you probably obtained a mortgage to finance and purchase. That mortgage is called “acquisition mortgage” because it enabled purchase of the residence. If you paid a loan fee to obtain the acquisition mortgage, usually called “points,” that loan fee qualifies as an itemized interest deduction. Each Point equals 1% of the amount borrowed.
2) Home improvement loan fees: If you paid a loan fee to obtain a home improvement loan, that loan fee is fully deductible in the tax year it was paid.
3) Loan fees paid to refinance a home loan or borrow against other real estate: If you refinanced your existing home loan last year, or borrowed against other real estate such as an apartment building, any loan fee you paid must be deducted over the life of the mortgage; i.e., if you paid a $1,000 loan fee to refinance with a new 30-year home mortgage, you can deduct $33.33 for each of the next 30 years.
4) When refinancing, deduct any undeducted loan fees: Thanks to low mortgage interest rates, many home owners refinanced again last year after previously refinancing a year or two earlier. These home owners should remember to deduct on last year’s income tax returns any undeducted loans fees from prior mortgage refinance.
5) If you bought or sold property last year, remember to deduct prorated real estate taxes: A major tax deduction many real estate buyers and sellers overlook is the prorated property tax they paid at the close of the escrow. Even if the other party remitted the payment to the tax collector, but you were charged a prorated portion of the tax bill, be sure to deduct your share on your last year’s return.
6) Deduct prorated mortgage interest in the year of property purchase or sale: Similarly, if you bought a residence (or other real estate) and took over an existing mortgage, don’t forget to deduct your prorated interest share for the month of the sale ( even if the seller makes the payment to the lender). Your closing settlement shows your prorated share of mortgage interest.
7) Mortgage prepayment penalty: If you paid off an existing mortgage early and were charged a prepayment penalty by the lender, that prepayment qualified as an itemized deduction.
8) When land rent payments qualify as interest deductions: Millions of homes are located on leased land an Internal Revenue Code 163(c) allows land rent to be deducted like interest when the lease: (a) is for at least 15 years, including renewal periods; (b) is freely assignable; (c) contains a present or future option to buy the land; and (d) is like a security interest, such as a mortgage. Of course payments to buy the land are not deductible, nor are ground rent payments deductible if you do not have the option to buy the land, such as in a mobile home park.
9) Home construction loan interest: If you built a new home last year, or are building one now, don’t forget to deduct the construction loan interest paid. It’s deductible if the construction period does not exceed 24 months before occupancy of your principle residence.
10) Deduct prepaid property taxes and mortgage interest: If you prepaid this year’s real estate taxes last year, as home owners do to increase their tax deductions, or if you paid your January of this year mortgage payment in December of last year, don’t forget to deduct these extra mortgage interest and property tax payments on last year’s income tax returns.
**For a more comprehensive understanding of the legal/tax consequences, we strongly suggest your contacting an attorney and/or CPA for specific advice on the matters stated herein.
Compliments of Lorrie Williams and Gabriela Frey, Financial Title located in Albany, California. Lorrie can be reached at; lawilliams@financialtitle.com.
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