From the Patrick Parker Realty Tax Season Blog Series:
7 Ways To Avoid An Audit
Reduce Your Chances of Getting A Second Look From The IRS with Tips From the Pros

tax-dayThat’s it… it’s here… Tax Day is the 15th!

It’s the 1% no one wants to be a part of: the share of Americans who get audited.

The Internal Revenue Service is tracking down people who may be shorting the tax man by understating their income, exaggerating tax breaks and skipping out on other tax liabilities. And it isn’t just the rich and famous that agents are going after. Six percent of the IRS audits conducted on individuals in 2012 were for people who made between $200,000 and $1 million, according to IRS data.

Taxpayers can get flagged for forgetting important forms, mixing up numbers and erroneously claiming tax breaks. Sometimes, one mistake can open the door for the IRS to take a closer look at the rest of the return, tax pros say. “You don’t want to go through that headache,” says Paul Gevertzman, a partner at Anchin, Block & Anchin, an accounting firm in New York City.

That said, most taxpayers can stay in the clear if they report their income honestly and have the proper documentation. And while there is no such thing as “audit-proofing” a return, taxpayers can take steps to reduce their chances of facing extra scrutiny from Uncle Sam.

Here are 7 things you can do to avoid getting audited:

1. Watch what you tweet
Tax officials don’t just scour public records in their efforts to catch tax cheats. They also check Facebook, Twitter and other websites for clues that a person may be lying about the scope of their business and how much they make.

For example, some tax officials may take note if a small business owner boasts online about business projects taking place in multiple states but doesn’t report that income to the IRS and the respective state tax authorities, says Gevertzman. Likewise, taxpayers who claim they are having financial difficulties in an effort to reduce the taxes they owe should not post on social media about how much business is booming.The IRS says audit decisions are based on the information taxpayers provide on their returns, not what they post on social media. The agency, however, might monitor publicly available information to help with an existing case. And agents are not allowed to use fake profiles or deceive people on social media sites to collect information.

2. Report all of your income
Most taxpayers know to report all income stated on their W-2 and 1099 forms, since the IRS has matching software that can help it catch income that was reported under a person’s Social Security number. But even less obvious income should be reported, tax pros say. This includes income earned by self-employed individuals that may not appear on a 1099 form. People should also report gambling winnings, which casinos must generally report to the IRS, says Melanie Lauridsen, a technical manager on the tax staff for the American Institute of Certified Public Accountants.

For instance, winnings of at least $1,200 from a bingo game or slot machine must be reported, according to IRS rules, as well as prizes of more than $5,000 from a poker tournament, though the requirements vary per game. (Gambling winnings can also be offset by losses if taxpayers can provide receipts and other documentation.) People also need to report prizes they don’t realize are taxable, like the baseball fan who catches a home run ball that could be worth hundreds or thousands of dollars, says Lauridsen. Any athletes bringing home medals from the Winter Olympics in Sochi may also have to face the tax man when they return.

3. Don’t mix business with pleasure
Self-employed taxpayers need to be careful when claiming tax breaks and writing off business expenses if they don’t want to get a double-take from the IRS. Taxpayers often forget, for instance, that only 50% of business meal and entertainment expenses can be deducted, and they must be identified as business costs. People looking to write off travel expenses should keep logs of business trips and visits made to clients to work-related travel costs from those incurred on personal trips. And even though the IRS has introduced a simplified option for claiming the home office deduction, the office still has to meet the main requirement of being used exclusively for business and of being the main place of business. That means that if the children are using the room to play games or watch TV, the office gets disqualified, says Lauridsen.

4. Pay your nanny taxes
Families who find they need to hire someone like a nanny or a home health aide may be more focused on their daily chores than the IRS, but the decision could come with added tax responsibilities. Such workers need to be reported properly to the IRS and families may need to pay Social Security and Medicare taxes and to withhold the worker’s share of those taxes just like any employer, says Stephanie Breedlove, vice president of Care.com HomePay, a company that helps families handle payroll taxes and labor law.

The rules apply to anyone who was paid more than $1,800 last year or $1,900 this year. Often, families don’t realize their error until they’ve parted ways with the nanny and he or she tries to file for unemployment benefits and state authorities learn the person was paid off the books, says Breedlove. Those families then need to pay any back taxes and penalties owed and could be found guilty of tax evasion, she says. Families should also avoid incorrectly listing the nanny as an employee of a small business they may own, which could lead to an exaggeration of business credits and deductions.

5. Exaggerating charitable deductions
Tax pros say that many taxpayers forget to write off furniture, clothing and other items they donate to charity. But claiming those items incorrectly or exaggerating their value could get a return flagged by the IRS. Clothes and home appliances must be valued at their thrift store prices and not their original sale prices, says Lauridsen of the AICPA.

“People have a tendency to be emotionally attached to their things so they have a tendency to over value them when they’re doing charitable contributions,” she says. Salvation Army and Goodwill offer guides to help donors determine the value of certain items. Pricier items like paintings, homes and land need to be appraised at the time of donation. Donated cars, which are likely to be sold by charitable organizations, will be valued based on the price that the group gets for selling the car.

6. Don’t try to write off hobbies
Some people may try to write off losses they’ve incurred from a side business like horse breeding or a small business making and selling hand crafted toys. But the IRS requires taxpayers to show they’re going into these ventures with the intention of making a profit. If they lose money year after year, the IRS prohibits taxpayers from using those losses to offset other income unless they can show they made a profit in at least 3 of the last 5 tax years, or 2 of the last 7 tax years.

The IRS also looks to see if taxpayers are making changes to try to make the venture profitable and if they depend on that income to live on. “ You’ve got to show why it’s still a business,” says Gevertzman. Those who don’t make a good case may be suspected of investing in the hobby solely for the purpose of creating a loss that could be used to reduce their tax bill—and they could owe penalties and interest for any taxes they underpaid in the past.

7. Go over the numbers one more time
This sounds like a no brainer but the IRS caught 2.7 million math errors on tax returns in 2012. Taxpayers often make mistakes when calculating how much they owe and how big their refunds should be. Those blunders can get the attention of the IRS, which scans for deductions that seem out of line with a person’s income, says Gevertzman. Some people who accidentally reverse numbers or make enter incorrect Social Security numbers and checking account information could also have their returns held up and their refunds delayed says Lauridsen of the AICPA. Many of these errors can be caught early or avoided through electronic filing. It also helps to use exact numbers, since rounded numbers may give the IRS reason to request more specific figures and documentation.

Keep in mind that this is general information designed to help you put these valuable deductions on your radar. Patrick Parker Realty Agents and Realtors are not certified accountants. Please be sure to check with your tax adviser to see if you qualify for a particular credit or deduction.

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The Patrick Parker Realty Tax Season Blog Series will cover many topics as they relate to real estate and increasing your income tax refund. Such topics will include Home Ownership Tax Breaks, Hidden Tax Deductions, Deductions on Mortgage Interest, Reporting on the Sale of Your Home, Home Purchase Tax Credits and more. In addition, our Blog Series will explore Tax Incentives as they relate to major transitions and lifestyles; Marriage, Birth, Divorce, Death of Spouse, Health Insurance, Caretaking of Dependents, Business Owners, Commuters and more.

Check in to The Patrick Parker Realty Blog each Tuesday, Thursday and Saturday through Tax Day for new posts. You can also follow The Patrick Parker Realty Tax Season Blog Series on Facebook and Twitter using #taxseasonblog.

More Info About The Patrick Parker Realty Tax Season Blog Series >
Tax Terms Glossary >
More Tax Aspects of Home Ownership >

For more information about paying taxes on the sale or purchase of your home or any other questions you have about this article please speak with your tax professional or visit www.irs.gov.

From the Patrick Parker Realty Tax Season Blog Series:
Tax Implications: Converting A Second Home Into A Primary Residence

ppre-refundAlthough the rule that allows homeowners to take up to $500,000 of profit tax-free applies only to the sale of your principal residence, it has been possible to extend the break to a second home by converting it to your principal residence before you sell. Once you live in that home for two years, you have been able to exclude up to $500,000 of profit again. That way, savvy taxpayers can claim the exclusion on multiple homes.

Note: Congress has clamped down on this break for taxpayers who convert a second home into a principal residence after 2008. A portion of the gain on a subsequent sale of the home will be ineligible for the home-sale exclusion, even if the seller meets the two-year ownership-and-use tests.

The portion of the profit subject to tax is based on the ratio of the time after 2008 when the house was a second home or a rental unit, to the total amount of time you owned it. So if you have owned a vacation home for 18 years and make it your main residence in 2013 for two years before selling it, only 10 percent of the gain (two years of nonqualified second home use divided by 20 years of total ownership) is taxed. The rest would qualify for the exclusion of up to $500,000.

Keep in mind that this is general information designed to help you put these valuable deductions on your radar. Patrick Parker Realty Agents and Realtors are not certified accountants. Please be sure to check with your tax adviser to see if you qualify for a particular credit or deduction.

_____________________________________________________________________


The Patrick Parker Realty Tax Season Blog Series will cover many topics as they relate to real estate and increasing your income tax refund. Such topics will include Home Ownership Tax Breaks, Hidden Tax Deductions, Deductions on Mortgage Interest, Reporting on the Sale of Your Home, Home Purchase Tax Credits and more. In addition, our Blog Series will explore Tax Incentives as they relate to major transitions and lifestyles; Marriage, Birth, Divorce, Death of Spouse, Health Insurance, Caretaking of Dependents, Business Owners, Commuters and more.

Check in to The Patrick Parker Realty Blog each Tuesday, Thursday and Saturday through Tax Day for new posts. You can also follow The Patrick Parker Realty Tax Season Blog Series on Facebook and Twitter using #taxseasonblog.

More Info About The Patrick Parker Realty Tax Season Blog Series >
Tax Terms Glossary >
More Tax Aspects of Home Ownership >

For more information about paying taxes on the sale or purchase of your home or any other questions you have about this article please speak with your tax professional or visit www.irs.gov.

From the Patrick Parker Realty Tax Season Blog Series:
Tax Tips for Short Sales

ppre-refundUnderstanding how a short sale or restructure will be viewed by the Internal Revenue Service can help you plan your tax situation ahead of time.

If you are in a position where you have to sell your house for less than the amount you owe on it or have to restructure your mortgage with the lender in order to avoid foreclosure proceedings, you may face tax implications on the transaction. Understanding how a short sale or restructure will be viewed by the Internal Revenue Service can help you plan your tax situation ahead of time.

What is a short sale?
A short sale happens when you sell your property for less than what you owe on its mortgage(s). A short sale has to be approved by your lender because it will not receive the full amount of the outstanding loans.

After the sale, the loan will still have an unpaid balance, called the deficiency. Depending on the lender and the laws of your state, a short sale can result either in you owing the deficiency to the lender as unsecured debt, or in the lender forgiving the deficiency. A short sale is often negotiated as an alternative to foreclosure, as it often involves fewer costs and fees.

MORE INFO: The Mortgage Forgiveness Debt Relief Act and Debt Forgiveness

Tax implications of forgiven debt
If your lender forgives the balance of your mortgage after the short sale, you may not be out of the woods yet. You may have to include the forgiven debt as taxable income in the year of the short sale. The Mortgage Forgiveness Debt Relief Act of 2007 exempted that income through 2014 from taxation, up to $2 million, if it was your principal residence, or main home. However, the tax still applies to second or vacation houses as well as rental properties. Beginning in 2015, the exemption is no longer available unless it is reinstated.

Mortgage restructuring
Before seeking a short sale or being forced into a foreclosure, you may be able to negotiate a mortgage restructuring to allow you to stay in your home and to be more able to afford your mortgage’s terms and interest rate. These types of loan modifications can take many forms and may include:

• Reduced interest rates
• A reduction of the loan principal
• Stretching out the payments over a longer time frame to make payments smaller

Of these options, only a principal reduction may have income tax implications. The principal reduction may be considered taxable income to you in the year of the restructure. If the property is your main home, it will fall under the provisions of the Mortgage Forgiveness Debt Relief Act and will be excluded from taxable income.

Dealing with incorrect 1099-C forms
If your lender has reduced or eradicated your debt under a short sale or mortgage restructure, it will send you IRS Form 1099-C at the end of the year, showing the amount of the debt forgiven and the fair market value of the property. Review the document carefully and compare it to your own figures. If it contains misstatements, contact the lender and attempt to have it correct the form. If it is not able, or not willing, to do that in a timely manner, recalculate the correct figures and provide the IRS with documentation showing how you arrived at your figures when you file your income tax return.

Keep in mind that this is general information designed to help you put these valuable deductions on your radar. Patrick Parker Realty Agents and Realtors are not certified accountants. Please be sure to check with your tax adviser to see if you qualify for a particular credit or deduction.

_____________________________________________________________________

The Patrick Parker Realty Tax Season Blog Series will cover many topics as they relate to real estate and increasing your income tax refund. Such topics will include Home Ownership Tax Breaks, Hidden Tax Deductions, Deductions on Mortgage Interest, Reporting on the Sale of Your Home, Home Purchase Tax Credits and more. In addition, our Blog Series will explore Tax Incentives as they relate to major transitions and lifestyles; Marriage, Birth, Divorce, Death of Spouse, Health Insurance, Caretaking of Dependents, Business Owners, Commuters and more.

Check in to The Patrick Parker Realty Blog each Tuesday, Thursday and Saturday through Tax Day for new posts. You can also follow The Patrick Parker Realty Tax Season Blog Series on Facebook and Twitter using #taxseasonblog.

More Info About The Patrick Parker Realty Tax Season Blog Series >
Tax Terms Glossary >
More Tax Aspects of Home Ownership >

For more information about paying taxes on the sale or purchase of your home or any other questions you have about this article please speak with your tax professional or visit www.irs.gov.

 

Monmouth Residents Riled by New Home Tax Assessment Program
Originally appeared on app.com

MONMOUTH-COUNTY-HOME-TAX-ASSESSMENTThe roughly $42,000 increase in Matt Fraley’s Hazlet home tax assessment left him shocked and dumbfounded.

It wasn’t just the number — almost 17 percent increase over last year’s assessment — but the basis for it.

“There hasn’t been any improvements in the area,” said Fraley, who has owned his home for 26 years, now valued at $294,000. ” How do you justify an increase?”

Across Monmouth County, a new way of assessing property values, the Assessment Demonstration Program or ADP, is leaving property owners either outraged over hefty assessment increases — or quietly celebrating a lower valuation.

READ: A NOTICE TO ALL TAX PAYERS FROM THE ACCESSORS OFFICE

The pocketbook pain for many taxpayers could go substantially beyond the much-touted 2 percent property tax cap.

Tax bills are based on property values, also called assessments, and the goal of the new program is to make those numbers every year as close as possible to what a homeowner would be paid if the house was sold on the open market. As with any rejiggering of the tax roles, more will pay, well, more to make up for the lost revenue from others who win a tax cut.

READ: LEARN ABOUT APPEAL OPTIONS

What impact the new assessment program will have on the local taxes of homeowners, though, is still up in the air. Towns are just now preparing their annual budgets. Any tax bill boosts won’t be seen until August or later.

While Monmouth County is experimenting with a new assessment, Ocean and 19 other counties operate are under the current system. That means homeowners who think their properties have been overpriced by the government have until April 1 to file an appeal with the county tax board. Residents in Lacey, Little Egg Harbor and Stafford — all towns going through local reassessments — have until May 1.

Visit www.DataUniverse.com for (a) “how to” guide on researching assessments to see if a tax appeal is the right course for you.

This is general information designed to help you put these valuable deductions on your radar. Patrick Parker Realty Agents and Realtors are not certified accountants. Please be sure to check with your tax adviser to see if you qualify for a particular credit or deduction.

_____________________________________________________________________

The Patrick Parker Realty Tax Season Blog Series will cover many topics as they relate to real estate and increasing your income tax refund. Such topics will include Home Ownership Tax Breaks, Hidden Tax Deductions, Deductions on Mortgage Interest, Reporting on the Sale of Your Home, Home Purchase Tax Credits and more. In addition, our Blog Series will explore Tax Incentives as they relate to major transitions and lifestyles; Marriage, Birth, Divorce, Death of Spouse, Health Insurance, Caretaking of Dependents, Business Owners, Commuters and more.

Check in to The Patrick Parker Realty Blog each Tuesday, Thursday and Saturday through Tax Day for new posts. You can also follow The Patrick Parker Realty Tax Season Blog Series on Facebook and Twitter using #taxseasonblog.

More Info About The Patrick Parker Realty Tax Season Blog Series >
Tax Terms Glossary >
More Tax Aspects of Home Ownership >

For more information about paying taxes on the sale or purchase of your home or any other questions you have about this article please speak with your tax professional or visit www.irs.gov.

From the Patrick Parker Realty Tax Season Blog Series
Tax Breaks and Home Ownership

new-jersey-taxesHome ownership brings with it not only many trips to home improvement stores, but also a slew of tax breaks. It’s up to you to take full advantage of the write-offs available to you.

This post covers:

  • Mortgage Interest
  • Points
  • Real Estate Taxes
  • Certain Mortgage Interest Payments
  • Home Improvements
  • Home Expenses

Here’s what you can and can’t deduct:

Mortgage interest
For most people, the biggest home-related deduction is for mortgage interest. How do you figure out how much you’ve paid in mortgage interest during the year?

You should receive a statement from your lender by the end of January listing the mortgage interest you paid during the previous year. This statement will be labeled Form 1098. It may be attached to, or part of, your monthly mortgage statement, so be sure that you study your your January statement carefully to identify any portion that may be labeled as Form 1098. The amount shown as interest paid on Form 1098 is the amount you deduct on your tax return.

Where do I take this deduction?
Fill out Schedule A, Itemized Deductions, to take a deduction for mortgage interest.

  • If you received Form 1098 reporting the amount of mortgage interest you paid for the year, record your interest deduction on Line 10.
  • If you didn’t receive Form 1098, use Line 11 instead.

If your home loan is with a private party (for example, with the person from whom you bought the home), you may not receive a statement of interest paid even though your mortgage holder should complete one for you. You can still deduct the interest as long as your loan is secured by your home.

Report your lender’s name, address and Social Security number on the lines next to Line 11. (You should have been given this information during the closing of your home purchase). Remember that you have to be liable for repayment of the loan to deduct mortgage interest. If you pay your son’s or daughter’s mortgage to help them out, for example, you cannot deduct the interest unless you co-signed the loan.

What about late charges?
You can deduct a late payment charge as home mortgage interest as long as the charge was not for a specific service you received in connection with your mortgage loan.

What about a prepayment penalty?
If you pay off your home mortgage early and you’re required to pay a prepayment penalty, you may deduct that penalty as home mortgage interest as long as the charge was not for a specific service you received in connection with your mortgage loan.

For more information on mortgage interest, see IRS Publication 936: Home Mortgage Interest Deduction.

Points
When you buy a house, you often have to pay points to the lender to get your mortgage. These points can usually be deducted as prepaid interest. Other terms for points are:

  • Loan origination fees
  • Maximum loan charges
  • Loan discount
  • Discount points

You may deduct any points you pay, or points your seller paid on your behalf, in the year in which you pay the points, if you meet all of these requirements:

  • Your loan is secured by your primary residence (the one you live in most of the time).
  • Paying points is usual for your area.
  • The amount of the points isn’t out of line for your area.
  • You use the cash method of accounting for expenses (you most likely do). Using the cash method means you report income in the year you receive it and deduct expenses in the year you pay them.
  • The loan was used to buy, improve or build your home.
  • The points are computed as a percentage of the loan principal.
  • The points are clearly delineated on your settlement statement.
  • You put cash into your home purchase in an amount at least equal to the points you (and the seller) were charged. If you and the seller were charged a total of $3,000 in points, for example, you pass this test as long as your down payment was at least $3,000.

Some points do not meet these criteria. They may still be deductible, but you have to deduct them over the life of the loan.

  • Points paid for refinancing generally can only be deducted over the life of the new mortgage. If you pay $2,000 in points to refinance a 30-year mortgage, for example, you’d deduct that amount over 30 years—about $67 a year. It’s up to you to remember to take this deduction each year.
  • Points you pay on loans secured by your second home also can be deducted only over the life of the loan.

“Points” charged for specific services, such as preparation costs for a mortgage note, appraisal fees or notary fees, are not interest and cannot be deducted.

For more details on deducting points, see IRS Topic 504: Home Mortgage Points.

Real Estate Taxes
You can deduct annual taxes based on the assessed value of your property.

Where do I find how much I’ve paid in property taxes?

  • Your mortgage interest statement may list the amount of real estate taxes you paid if you use an escrow or impound account with your lender to cover real estate taxes and homeowner insurance.
  • If your real estate taxes aren’t included in escrow payments made with your mortgage payments, look through your cancelled checks to figure out how much you paid for property taxes during the year.
  • Be sure to pick up any real estate taxes included on your settlement or closing statement as well.

Caution: Don’t deduct your payments into your escrow account as real estate taxes. Your deposits are simply money put aside to cover tax payments. You should deduct only the actual property tax payments made from the account by your lender during the year.

Where do I take the deduction?
If you itemize, deduct your real estate taxes on Line 6 of Schedule A.

What can’t I deduct as property taxes?
You can’t deduct charges for services to a specific property or for specific people even if the payments are made to the taxing authority in your area.

Examples include:

  • A unit fee for the delivery of a service (such as water delivery).
  • A charge for a residential service, such as trash collection
  • A flat charge paid for a single service provided to you. specifically by your local government.
  • Amounts you pay for local benefits that tend to increase the value of your property, such as the construction of streets, sidewalks or water and sewer systems. But you can deduct whatever you pay for assessments for repairs or maintenance.

Certain Mortgage Interest Payments
Through 2014, if you pay private mortgage insurance (PMI) premiums on a qualifying policy issued after 2006, you can generally deduct the premiums as additional mortgage interest. Claim the deduction on Line 13 of Schedule A.

The full deduction can only be taken if your Adjusted Gross Income (AGI) is $100,000 or less ($50,000 if you use married filing separate status). The deduction is phased out for incomes greater than this. The amount of PMI that you pay for the year can be found on Form 1098, which you receive from your mortgage lender.

Mortgage insurance, which protects the lender if you default, should not be confused with more common homeowner’s or fire insurance.

Home Improvements
Save receipts and records for all improvements you make to your home, such as landscaping, storm windows and fencing. You can’t deduct these expenses now, but when you sell your home the cost of the improvements is added to the purchase price of your home to determine the cost basis in your home. This will reduce any potential taxable gain that you may have from the sale of your home.

Home expenses you can’t deduct
A number of significant costs of home ownership are not deductible, including:

  • Homeowner’s insurance premiums
  • Fire insurance premiums
  • FHA mortgage-insurance premiums
  • Principal payments made on your mortgage
  • Title or mortgage insurance
  • Utilities, such as gas, electricity, water or trash collection
  • Most settlement costs on your closing or settlement statement, including transfer taxes and Mortgage Recording Taxes
  • Homeowner’s association dues and fees

Keep in mind that this is general information designed to help you put these valuable deductions on your radar. Patrick Parker Realty Agents and Realtors are not certified accountants. Please be sure to check with your tax adviser to see if you qualify for a particular credit or deduction.
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Follow The Patrick Parker Realty Tax Season Blog Series on Facebook and Twitter using #taxseasonblog.

Check back in with the Patrick Parker Realty Blog each Tuesday, Thursday and Saturday for more Tax Season Blog Series’ Posts and sign up for the monthly Patrick Parker Realty eNewsletter to have updates delivered to your inbox.

The Blog Series will cover many topics such as How do I qualify for a home seller break?, How do I qualify for a home buyer break?, Do I have to report the home sale on my return?, What is the gain on the sale of my home?, What Are Home Renovation Tax Credits?, Deducting Mortgage Interest, Taking the First-Time Homebuyer Credit, How to Avoid Taxes on Canceled Mortgage Debt, Tax Incentives as they relate to Life’s biggest transitions, such as Marriage, the Birth of a Baby, Divorce, or the death of a Spouse and much more. New posts in this Blog Series will be published twice weekly.

More info about the Patrick Parker Realty Tax Season Blog Series >
Mortgage Term Glossary >
More Tax Aspects of Home Ownership >

For more information about paying taxes on the sale or purchase of your home or any other questions you have about this article please speak with your tax professional or visit www.irs.gov.

From the Patrick Parker Realty Tax Season Blog Series:
Tax Advantages of Buying Your First Home

ppre-refundBuying your first home is a huge step, but tax deductions available to you as a homeowner can reduce your tax bill.

Tax breaks ease the cost of mortgage
Buying a home is when you begin building equity in an investment instead of paying rent. And Uncle Sam is there to help ease the pain of high mortgage payments. The tax deductions now available to you as a homeowner will reduce your tax bill substantially.

If you have been claiming the standard deduction up until now, the extra write-offs from owning a home almost certainly will make you an itemizer. Suddenly, the state taxes you pay and your charitable donations will earn you tax-saving deductions, too.

So make sure you know about all these breaks covered here that may now be available to you:

• Mortgage interest
• Points
• Real estate taxes
• Private Mortgage Insurance premiums
• Penalty-free IRA payouts for first-time buyers
• Home improvements
• Energy credits
• Tax-free profit on sale
• Home equity loans
• Adjusting your withholding

Mortgage interest
For most people, the biggest tax break from owning a home comes from deducting mortgage interest. You can deduct interest on up to $1 million of debt used to acquire or improve your home.

Your lender will send you Form 1098 in January listing the mortgage interest you paid during the previous year. That is the amount you deduct on Schedule A. Be sure the 1098 includes any interest you paid from the date you closed on the home to the end of that month. This amount is listed on your settlement sheet for the home purchase. You can deduct it even if the lender does not include it on the 1098. If you are in the 25 percent tax bracket, deducting the interest basically means Uncle Sam is paying 25 percent of it for you.

Points
When you buy a house, you may have to pay “points” to the lender in order to get your mortgage. This charge is usually expressed as a percentage of the loan amount. If the loan is secured by your home and the amount of points you pay is typical for your area, the points are deductible as interest as long as the cash you paid at closing via your down payment equals the points.

For example, if you paid two points (2%) on a $300,000 mortgage—$6,000—you can deduct the points as long as you put at least $6,000 of your own cash into the deal. And believe it or not, you get to deduct the points even if you convinced the seller to pay them for you as part of the deal. The deductible amount should be shown on your 1098 form.

Real estate taxes
You can deduct the local property taxes you pay each year, too. The amount may be shown on a form you receive from your lender, if you pay your taxes through an escrow account. If you pay them directly to the municipality, though, check your records or your checkbook registry. In the year you purchased your residence, you probably reimbursed the seller for real estate taxes he or she had prepaid for time you actually owned the home.

If so, that amount will be shown on your settlement sheet. Include this amount in your real estate tax deduction. Note that you can’t deduct payments into your escrow account as real estate taxes. Your deposits are simply money put aside to cover future tax payments. You can deduct only the actual real estate tax amounts paid out of the account during the year.

Private Mortgage Insurance Premiums (PMI)
Buyers who make a down payment of less than 20 percent of a home’s cost usually get stuck paying premiums for Private Mortgage Insurance, which is an extra fee that protects the lender if the borrower fails to repay the loan. For mortgages issued in 2007 or after, home buyers can deduct PMI premiums.

This write-off phases out as adjusted gross income increases above $50,000 on married filing separate returns and above $100,000 on all other returns. (If you’re paying PMI on a mortgage issued before 2007, you’re out of luck on this one.) The PMI write-off is set to expired at the end of 2014, although Congress may extend it into future years.

Penalty-free IRA payouts for first-time buyers
As a further incentive to homebuyers, the normal 10 percent penalty for pre-age 59½ withdrawals from traditional IRAs does not apply to first-time home buyers who break into their IRAs to come up with the down payment. This exception to the 10 percent penalty does not apply to withdrawals from 401(k) plans.

At any age you can withdraw up to $10,000 penalty-free from your IRA to help buy or build a first home for yourself, your spouse, your kids, your grandchildren or even your parents. However, the $10,000 limit is a lifetime cap, not an annual one. (If you are married, you and your spouse each have access to $10,000 of IRA money penalty-free.) To qualify, the money must be used to buy or build a first home within 120 days of the time it’s withdrawn.

But get this: You don’t really have to be a first-time homebuyer to qualify. You’re considered a first-timer as long as you haven’t owned a home for two years. Sounds great, but there’s a serious downside. Although the 10 percent penalty is waived, the money would still be taxed in your top bracket (except to the extent it was attributable to nondeductible contributions). That means as much as 40 percent or more of the $10,000 could go to federal and state tax collectors rather than toward a down payment. So you should tap your IRA for a down payment only if it is absolutely necessary.

There’s a Roth IRA corollary to this rule, too. The way the rules work make the Roth IRA a great way to save for a first home. First of all, you can always withdraw your contributions to a Roth IRA tax-free (and usually penalty-free) at any time for any purpose. And once the account has been open for at least five years, you can also withdraw up to $10,000 of earnings for a qualifying first home purchase without any tax or penalty.

Home improvements
Save receipts and records for all improvements you make to your home, such as landscaping, storm windows, fences, a new energy-efficient furnace and any additions.

You can’t deduct these expenses now, but when you sell your home the cost of the improvements is added to the purchase price of your home to determine the cost basis in your home for tax purposes. Although most home-sale profit is now tax-free, it’s possible for the IRS to demand part of your profit when you sell. Keeping track of your basis will help limit the potential tax bill.

Energy credits
Some energy-saving home improvements to your principal residence can earn you an additional tax break in the form of an energy tax credit worth up to $500. A tax credit is more valuable than a tax deduction because a credit reduces your tax bill dollar-for-dollar.

You can get a credit for up to 10 percent of the cost of qualifying energy-efficient skylights, outside doors and windows, insulation systems, and roofs, as well as qualifying central air conditioners, heat pumps, furnaces, water heaters, and water boilers.

There is a completely separate credit equal to 30 percent of the cost of more expensive and exotic energy-efficient equipment, including qualifying solar-powered generators and water heaters. In most cases there is no dollar cap on this credit.

Tax-free profit on sale
Another major benefit of owning a home is that the tax law allows you to shelter a large amount of profit from tax if certain conditions are met. If you are single and you owned and lived in the house for at least two of the five years before the sale, then up to $250,000 of profit is tax-free. If you’re married and file a joint return, up to $500,000 of the profit is tax-free if one spouse (or both) owned the house as a primary home for two of the five years before the sale, and both spouses lived there for two of the five years before the sale.

Thus, in most cases, taxpayers don’t owe any tax on the home-sale profit. (If you sell for a loss, you cannot take a deduction for the loss.)

You can use this exclusion more than once. In fact, you can use it every time you sell a primary home, as long as you owned and lived in it for two of the five years leading up to the sale and have not used the exclusion for another home in the last two years. If your profit exceeds the $250,000/$500,000 limit, the excess is reported as a capital gain on Schedule D.

In certain cases, you can treat part or all of your profit as tax-free even if you don’t pass the two-out-of-five-year tests. A partial exclusion is available if you sell your home “early” because of a change of employment, a change of health, or because of other unforeseen circumstances, such as a divorce or multiple births from a single pregnancy.

A partial exclusion means you get part of the $250,000/$500,000 exclusion. If you qualify under one of the exceptions and have lived in the house for one of the five years before the sale, for example, you can exclude up to $125,000 of profit if you’re single or $250,000 if you’re married—50 percent of the exclusion of those who meet the two-out-of-five-year test.

Home equity loans
When you build up enough equity in your home, you may want to borrow against it to finance an addition, buy a car or help pay your child’s college tuition. As a general rule you can deduct interest on up to $100,000 of home-equity debt as mortgage interest, no matter how you use the money.

Adjusting your withholding
If your new home will increase the size of your mortgage interest deduction or make you an itemizer for the first time, you don’t have to wait until you file your tax return to see the savings. You can start collecting the savings right away by adjusting your federal income tax withholding at work, which will boost your take-home pay. Get a W-4 form and its instructions from your employer or go to www.irs.gov.

Keep in mind that this is general information designed to help you put these valuable deductions on your radar. Patrick Parker Realty Agents and Realtors are not certified accountants. Please be sure to check with your tax adviser to see if you qualify for a particular credit or deduction.

_____________________________________________________________________


The Patrick Parker Realty Tax Season Blog Series will cover many topics as they relate to real estate and increasing your income tax refund. Such topics will include Home Ownership Tax Breaks, Hidden Tax Deductions, Deductions on Mortgage Interest, Reporting on the Sale of Your Home, Home Purchase Tax Credits and more. In addition, our Blog Series will explore Tax Incentives as they relate to major transitions and lifestyles; Marriage, Birth, Divorce, Death of Spouse, Health Insurance, Caretaking of Dependents, Business Owners, Commuters and more.

Check in to The Patrick Parker Realty Blog each Tuesday, Thursday and Saturday through Tax Day for new posts. You can also follow The Patrick Parker Realty Tax Season Blog Series on Facebook and Twitter using #taxseasonblog.

More Info About The Patrick Parker Realty Tax Season Blog Series >
Tax Terms Glossary >
More Tax Aspects of Home Ownership >

For more information about paying taxes on the sale or purchase of your home or any other questions you have about this article please speak with your tax professional or visit www.irs.gov.

 

From the Patrick Parker Realty Tax Season Blog Series
5 Ways Buying Your First Home Affects Your Taxes

new-jersey-taxesIf you’re a first-time home buyer, plenty of things are working in your favor. Mortgage rates are still hovering near all-time lows, and despite home prices beginning to rise, they’re still low relative to pre-recession averages. Whether you buy your first home in a bear or a bull market, however, you’re always going to contend with tax implications. As long as you’re aware of relevant regulations and benefits, buying your first home should be the rewarding experience you’ve always dreamed it would be.

1. Home Mortgage Interest Tax Deduction
The most valuable tax deduction for a first-time home buyer is the mortgage interest tax deduction. Your tax return may take more time to complete than in past years since you’re going to have to itemize your deductions in order to take advantage of it, but doing so is in your best interest as it can result in a significant deduction. Be on the lookout for Form 1098 from your lender at year-end, which details how much mortgage interest you’ve paid.

2. Points Are Tax Deductible
When you pay “points” on a mortgage you’re paying extra money to your lender upon execution of the loan in order to lower your interest rate. Each point equals 1% of the purchase price of the home. This amount is tax deductible, however, the rules surrounding how and when you can deduct points paid are complex. In some cases, you cannot deduct the full amount in the year you pay it – you may have to deduct it over the life of your mortgage. For additional information, seeIRS Publication 936.

3. You Can Deduct Property Taxes
As a homeowner, you are required to pay property taxes. These are typically due once per year, although you may be able to pay them in two installments. Depending on property tax rates in your area, these can be significant expenditures. You can ameliorate the effect of property taxes on your finances by setting up a mortgage escrow account and paying your taxes in monthly increments. This is going to increase your monthly payment, but it protects you from having to write out a big check twice per year.

4. Private Mortgage Insurance is Usually Tax Deductible
If your down payment is less than 20% of the purchase price of your new home, you are often required to pay premiums for private mortgage insurance, which your lender takes out to protect against your potential default. In many cases, this payment is tax-deductible as well. The annual amount may be also included on your 1098 Form from your lender. Just be sure to cancel this insurance as soon as your level of home equity reaches 20%, if possible. Again, you can referenceIRS Publication 936 for all details.

5. Advantages of Getting Cash Back from the Seller
When purchasing your first home, you have the ability to request cash back from the seller, known as seller concessions. If you agree in advance, you can pay a higher sale price for the home, if the seller returns that money to you to use toward closing costs or home repairs.

There are limitations as to what you can use these funds for, usually determined by the lender or type of loan you’re applying for. Consult with a mortgage professional to find out which limitations apply to you. Although this plan results in a higher monthly payment, you can reduce your out-of-pocket expenses when purchasing the home, as well as boost your mortgage interest deduction.

And one more thing…
As a first-time home buyer, the first few years of your mortgage interest tax deduction are going to be significant. Make sure you use these funds effectively. The last thing you want is to blow your windfall on unneeded purchases. Instead, consider longer-term goals such as creating or building an emergency fund (which can come in handy in the event you need home repairs), setting these funds aside for retirement or your child’s college education.

Keep in mind that this is general information designed to help you put these valuable deductions on your radar. Patrick Parker Realty Agents and Realtors are not certified accountants. Please be sure to check with your tax adviser to see if you qualify for a particular credit or deduction.
____________________________________________________________________________________

Follow The Patrick Parker Realty Tax Season Blog Series on Facebook and Twitter using #taxseasonblog.

Check back in with the Patrick Parker Realty Blog each Tuesday, Thursday and Saturday for more Tax Season Blog Series’ Posts and sign up for the Patrick Parker Realty eNewsletter to have updates delivered to your inbox monthly.

The Blog Series will cover many topics such as How do I qualify for a home seller break?, How do I qualify for a home buyer break?, Do I have to report the home sale on my return?, What is the gain on the sale of my home?, What Are Home Renovation Tax Credits?, Deducting Mortgage Interest, Taking the First-Time Homebuyer Credit, How to Avoid Taxes on Canceled Mortgage Debt, Tax Incentives as they relate to Life’s biggest transitions, such as Marriage, the Birth of a Baby, Divorce, or the death of a Spouse and much more. New posts in this Blog Series will be published twice weekly.

More info about the Patrick Parker Realty Tax Season Blog Series >

For more information about paying taxes on the sale or purchase of your home or any other questions you have about this article please speak with your tax professional or visit www.irs.gov.

From the Patrick Parker Realty Tax Season Blog Series
Are Home Interest Loans Deductible From Taxes?

new-jersey-taxesThe federal government encourages you to purchase a home by allowing for the deduction of mortgage interest. Although other requirements exist, only the interest you actually pay during the year is eligible for a deduction. If you make a late mortgage payment in the following tax year, you must wait until that year to claim the deduction.

Collateral In Your Home
It’s likely that your mortgage lender has a security interest in your home as collateral for repayment of the loan. This security interest generally allows the bank to remain on the title to your home. As long as the mortgage document you sign includes this type of security interest, then you may be eligible to deduct your interest payments.

When checking your mortgage document, it may either expressly state this or will provide that in the event you default on mortgage payments, the bank can foreclose on your home and apply all sale proceeds to the outstanding mortgage balance. However, if you use a credit card to subsidize the purchase of your home, these interest payments are not deductible since the credit card company doesn’t have any security interest in your home.

Two Qualified Homes
The IRS limits the number of homes eligible for the deduction to your main home that you principally reside in plus one other home that you own. The tax law does not grant you discretion in choosing which residence to treat as the main home. This must always be the place where you ordinarily live for a majority of the year.

However, you can choose any second home to qualify for the deduction. Whichever second home you choose is only binding for the current tax year. Next year, you can deduct the mortgage interest on a different second home if it provides greater tax savings.

Deduction Limitations
To prevent taxpayers from claiming a deduction for luxurious homes, the law limits the deduction to the interest that you pay on up to $1 million in total mortgage balances. This $1 million limitation applies to the total of both mortgages.

For example, if you owe $600,000 on your main home and $800,000 on a vacation home, you cannot deduct the interest you pay that relates to the excess $400,000. In some cases, the excess interest may qualify for a deduction if it relates to a home equity loan.

Home Equity Loan Interest
If you take out a home equity loan, your interest payments may qualify for a deduction in addition to your mortgage interest. To qualify, you must have obtained the loan after Oct 13, 1987 and it must also be secured by your home.

For tax purposes, only the balance of the loan that is the smaller of $100,000 or your equity in the home qualifies for the interest deduction. Your equity is equal to the amount you could sell the home for minus the amount you still owe on the mortgage.

Reporting the Deduction
The deductions for home equity and mortgage interest are only available to taxpayers who are eligible to itemize deductions on a Schedule A attachment to their Form 1040. Eligibility to itemize requires that your total itemized deductions, including home interest, be greater than the standard deduction amount.
Keep in mind that this is general information designed to help you put these valuable deductions on your radar. Patrick Parker Realty Agents and Realtors are not certified accountants. Please be sure to check with your tax adviser to see if you qualify for a particular credit or deduction.
____________________________________________________________________________________

Follow The Patrick Parker Realty Tax Season Blog Series on Facebook and Twitter using #taxseasonblog.

Check back in with the Patrick Parker Realty Blog each Tuesday, Thursday and Saturday for more Tax Season Blog Series’ Posts and sign up for the Patrick Parker Realty eNewsletter to have updates delivered to your inbox monthly.

The Blog Series will cover many topics such as How do I qualify for a home seller break?, How do I qualify for a home buyer break?, Do I have to report the home sale on my return?, What is the gain on the sale of my home?, What Are Home Renovation Tax Credits?, Deducting Mortgage Interest, Taking the First-Time Homebuyer Credit, How to Avoid Taxes on Canceled Mortgage Debt, Tax Incentives as they relate to Life’s biggest transitions, such as Marriage, the Birth of a Baby, Divorce, or the death of a Spouse and much more. New posts in this Blog Series will be published twice weekly.

More info about the Patrick Parker Realty Tax Season Blog Series >

For more information about paying taxes on the sale or purchase of your home or any other questions you have about this article please speak with your tax professional or visit www.irs.gov.

From the Patrick Parker Realty Tax Season Blog Series
Tax Aspects of Home Ownership

This post will address some of the most common topics:

• Do I have to pay taxes on the profit I made selling my home?
• How do I qualify for this tax break?
• How do I qualify for a reduced exclusion?
• Deciding whether to take the exclusion
• Do I have to report the home sale on my return?
• Figuring the gain on the sale of a home
• What is the original cost of my home?
• What is the adjusted basis of my home?
• Postponed gains under the old “rollover” rules
• Converting a second home to a primary home
• At the bottom of this post we refer you to many helpful IRS Publications and Forms

new-jersey-taxesTax Aspects of Home Ownership
Though most home-sale profit is now tax-free, there are still steps you can take to maximize the tax benefits of selling your home. Learn how to figure your gain, factoring in your basis, home improvements and more.

Profit on home sale usually tax-free
Most home sellers don’t even have to report the transaction to the IRS. But if you’re one of the exceptions, knowing the rules will help you hold down your tax bill.

Do I have to pay taxes on the profit I made selling my home?
It depends on how long you owned and lived in the home before the sale and how much profit you made. If you owned and lived in the place for two of the five years before the sale, then up to $250,000 of profit is tax-free.

If you are married and file a joint return, the tax-free amount doubles to $500,000. The law lets you “exclude” this much otherwise taxable profit from your taxable income. (If you sold for a loss, though, you can’t take a deduction for that loss.)

You can use this exclusion every time you sell a primary residence, as long as you owned and lived in it for two of the five years leading up to the sale, and haven’t claimed the exclusion on another home in the last two years.

If your profit exceeds the $250,000 or $500,000 limit, the excess is reported as a capital gain on Schedule D.

How do I qualify for this tax break?
There are three tests you must meet in order to treat the gain from the sale of your main home as tax-free:

• Ownership: You must have owned the home for at least two years (730 days or 24 full months) during the five years prior to the date of your sale. It doesn’t have to be continuous, nor does it have to be the two years immediately preceding the sale. If you lived in a house for a decade as your primary residence, then rented it out for two years prior to the sale, for example, you would still qualify under this test.
• Use: You must have used the home you are selling as your principal residence for at least two of the five years prior to the date of sale.
• Timing: You have not excluded the gain on the sale of another home within two years prior to this sale.

If you’re married and want to use the $500,000 exclusion:

• You must file a joint return.
• At least one spouse must meet the ownership requirement, and both you and your spouse must have lived in the house for two of the five years leading up to the sale.

Special circumstances
Even if you don’t meet all of these requirements, there are special rules that may allow you to claim either the full exclusion or a partial exclusion:

• If you acquire ownership of a home as part of a divorce settlement, you can count the time the place was owned by your former spouse as time you owned the home for purposes of passing the two-out-of-five-years test.
• To meet the use requirement, you are allowed to count short temporary absences as time lived in the home, even if you rented the home to others during these absences. If you or your spouse is granted use of a home as part of a divorce or separation agreement, the spouse who doesn’t live in the home can still count the days of use that the other spouse lives in that home. This can come into play if one spouse moves out of the house, but continues to own part or all of it until it is sold.
• If either spouse dies and the surviving spouse has not remarried prior to the date the home is sold, the surviving spouse can count the period the deceased spouse owned and used the property toward the ownership-and-use test.

Members of the uniformed services, foreign service and intelligence agencies
You can choose to have the five-year-test period for ownership and use suspended for up to ten years during any period you or your spouse serve on “qualified official extended duty” as a member of the uniformed services, Foreign Service or the federal intelligence agencies. You are on qualified extended duty when, for more than 90 days or for an indefinite period, you are:

• At a duty station that is at least 50 miles from your main home, or
• Residing under government orders in government housing

This means that you may be able to meet the two-year use test even if, because of your service, you did not actually live in your home for at least the required two years during the five years prior to the sale.

How can I qualify for a reduced exclusion?
In certain cases, you can treat part of your profit as tax-free even if you don’t pass the two-out-of-five-years tests. A reduced exclusion is available if you sell your house before passing those tests because of a change of employment, or a change of health, or because of other unforeseen circumstances, such as a divorce or multiple births from a single pregnancy. So if you need to move to a bigger place to find room for the triplets, the law won’t hold it against you.

Note: A reduced exclusion does NOT mean you can exclude only a portion of your profit. It means you get less than the full $250,000/$500,000 exclusion. For example, if a married couple owned and lived in their home for one year before selling it, they could exclude up to $250,000 of profit (one-half of the $500,000 because they owned and lived in the home for only one-half of the required two years).

Deciding whether to take the exclusion
Would it ever make sense to turn down the government’s generosity and not claim the exclusion?

Although it’s very unlikely, paying tax on a home sale can make sense if it preserves the exclusion to protect more profit on another home that you plan to sell within two years. Remember, although you can use the exclusion any number of times during your life, you can’t use it more than once every two years.

Do I have to report the home sale on my return?
You generally can skip reporting your home sale on your income tax return, as long as you did not receive a Form 1099-S: Proceeds from Real Estate Transactions from the real estate closing agent — a title company, real estate broker or mortgage company.

To avoid getting this form (and having a copy sent to the IRS), you must give the agent some assurances at any time before February 15 of the year after the sale that all the profit on the sale is tax-free. To do so, you must assure the agent that:

• You owned and used the residence as your principal residence for periods totaling at least two years during the five-year period ending on the date of the sale of the residence.
• You have not sold or exchanged another principal residence during the two-year period ending on the date of the sale or exchange of the residence.
• No portion of the residence was used for business or rental purposes by you or your spouse.
• At least one of the following three statements applies:
o The sale price is $250,000 or less
o You are married, the sale price is $500,000 or less, and the gain on the sale is $250,000 or less
o You are married, the sale price is $500,000 or less, and:
 You intend to file a joint return for the year of the sale or exchange.
 Your spouse also used the residence as his or her principal residence for periods totaling two years or more during the five years ending on the date of the sale.
 Your spouse also has not sold or exchanged another principal residence during the two-year period ending on the date of the sale or exchange of the residence.

Essentially, the IRS does not require the real estate agent who closes the deal to use Form 1099-S to report a home sale amounting to $250,000 or less ($500,000 or less for married couples filing jointly).

You should not receive a Form 1099-S from the real estate closing agent if you made these assurances. If you don’t receive the form, you don’t need to report your home sale at all on your income tax return.

If you did receive a Form 1099-S, that means the IRS got a copy as well. That doesn’t necessarily mean you owe tax on the sale, though. It could be a mistake, or the closing agent might not have had the proper paperwork. If you qualify for the exclusion to make all of your profit tax-free, don’t report the home sale. But make sure all your paperwork is in order to show the IRS if it asks.

Figuring gain on the sale of a home
You have a gain if you sell your house for more than it cost. Ah, but how do you calculate the real cost? For tax purposes, you need to pinpoint your adjusted basis to figure out whether or not you have gained or lost in the sale.

The adjusted basis is essentially what you’ve invested in the home; the original cost plus the cost of capital improvements you’ve made. Capital improvements add value to your home, prolong its life, or give it a new or different use. They don’t include expenses for routine maintenance and minor repairs, such as painting. Examples of improvements are a new roof, a remodeled kitchen, a swimming pool, or central air conditioning. You add these expenses to your original cost to increase your adjusted basis (which in turn decreases the amount of gain on a sale).

On the other hand, you need to subtract any depreciation, casualty losses or energy credits that you have claimed to reduce your tax bill while you’ve owned the house. Also, if you postponed paying taxes on the gains from selling a previous home (as was allowed prior to mid-1997 for homeowners who used the profits to buy a more expensive replacement house), then you must also subtract that gain from your adjusted basis. Let’s say you bought a house for $50,000 in 1993, sold it for $75,000 in 1996, and postponed the tax on the $25,000 profit by purchasing a new home for $110,000. The basis of the new home would be $85,000 (the $110,000 cost minus the $25,000 of non-taxed profit on the first sale).

What is the original cost of my home?
The original cost of your home, for most people, is the amount you paid for it.

If you purchased your home from someone else, the price you paid is your purchase price (plus certain settlement and closing costs). Your closing statement should list all of these costs. Don’t include items from your closing statement that are personal and routine expenses, such as insurance or homeowner association dues, and don’t include the prorated amounts for property taxes and interest.

If you built your home, your original cost is the cost of the land, plus the amount it cost you to construct your home, including amounts paid to your contractor and subcontractors, your architect fees, if any, and connection charges you paid to utility providers.

If you inherited your home, your basis in the home will be the number you use for “original cost.” For death’s in any year except 2010, your basis is the fair market value of your home on the date of the previous owner’s death, or on the alternate valuation date if the executor of the estate elected to value the estate’s assets as of six months after the owner’s death. If the person died in 2010, special basis rules apply depending on your relationship to the deceased. Check with the executor of the estate, who should be able to provide you with information about the basis of your home.

What is the adjusted basis of my home?
The adjusted basis is simply the cost of your home adjusted for tax purposes by improvements you’ve made or deductions you’ve taken.

For example, if the original cost of the home was $100,000 and you added a $5,000 patio, your adjusted basis becomes $105,000. If you then took an $8,000 casualty loss deduction, your adjusted basis becomes $97,000.

Here’s how you calculate the adjusted basis on a home:

Start with the purchase price of your home (as described above)

• Or, if you filed Form 2119 when you originally acquired your old home to postpone gain on the sale of a previous home (back in 1997 or earlier), use the adjusted basis of the new home calculated on your Form 2119. (See Postponed Gains Under the Old “Rollover” Rules section.)

To that starting basis add:

• The cost of any improvements that added value to your home, prolonged its useful life, or gave it a new or different use
• Any special tax assessments you paid
• Amounts spent after a casualty (a disaster such as a hurricane or tornado) to restore damaged property

From that upwardly adjusted basis subtract:

• Certain settlement fees or closing costs
• Depreciation allowed for any business use portion of your home
• Residential energy credits claimed for capital improvements
• Payments received for easements or right-of-ways
• Insurance reimbursements for casualty losses
• Casualty losses (from accidents and natural disasters) that you deducted on your tax return
• Adoption credits or nontaxable adoption assistance payments for improvements added to the basis of your home
• First-time homebuyer credit
• Energy conservation subsidies excluded from your gross income
• Any mortgage debt on your principal residence that was discharged after 2006 but before 2014, if you excluded this amount from your gross income

The result of all these calculations is the adjusted basis that you will subtract from the selling price to determine your gain or loss. This adjusted basis is what’s considered to be your cost of the home for tax purposes.

Basis when you inherit a home
If you inherited your home from your spouse in any year except 2010 and you lived in a community property state—Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington or Wisconsin—your basis will generally be the fair market value of the home at the time of your spouse’s death.

If you lived somewhere other than a community property state, your basis for the inherited portion of the home in any year except 2010 will be the fair market value at your spouse’s death multiplied by the percentage of the home your spouse owned. If your spouse solely owned the home, for example, the entire basis would be “stepped up” to date-of-death value. If you and your spouse jointly owned the home, then half of the basis would rise to date-of-death value.

If you inherited your home from someone other than your spouse in any year except 2010, your basis will generally be the fair market value of the home at the time the previous owner died. If the person you inherited the home from died in 2010, special rules apply. Your basis generally is the same as the person you inherited the property from. However, the executor has the option to increase the basis of property passing to a non-spouse by $1.3 million and property passing to a spouse by $3 million. To find out the exact basis of any property you inherit, check with the estate’s executor.

Divorce and tax basis
If you received your home from your former spouse as part of a divorce after July 18, 1984, your tax basis generally will be the same as your basis as a couple at the time of the divorce. So if your former spouse was the sole owner of the home, his or her basis becomes your basis. If the place was jointly owned, you now claim the full basis.

If you divorced before July 19, 1984, your basis will generally be the fair market value at the time you received it.

Postponed gains under the old “rollover” rules
In the past, you may have put off paying the tax on a gain from the sale of a home, usually because you used the proceeds from the sale to buy another home. Under the old rules, this was referred to as “rolling over” gain from one home to the next. This postponed gain will affect your adjusted basis if you are selling that new home. The tax on that original sale wasn’t eliminated, just deferred to some future date.

You can no longer postpone gain on the sale of your personal residence. For sales after May 7, 1997, you normally must choose whether to exclude the gain on the sale of your personal residence or to report the gain as taxable income in the year it is sold. You no longer have the option to postpone paying taxes on the gain by purchasing a more expensive residence.

To see how a rollover of gain prior to the change in the law can affect your profit, consider this example: Let’s say you bought a house for $50,000 in 1993, sold it for $75,000 in 1996 and postponed the tax on the $25,000 profit by purchasing a new home for $110,000. The basis of the new home would be $85,000 (the $110,000 cost minus the $25,000 on non-taxed profit on the first sale).

Converting a second home to a primary residence
Although the rule that allows homeowners to take up to $500,000 of profit tax-free applies only to the sale of your principal residence, it has been possible to extend the break to a second home by converting it to your principal residence before you sell. Once you live in that home for two years, you have been able to exclude up to $500,000 of profit again. That way, savvy taxpayers can claim the exclusion on multiple homes.

Note: Congress has clamped down on this break for taxpayers who convert a second home into a principal residence after 2008. A portion of the gain on a subsequent sale of the home will be ineligible for the home-sale exclusion, even if the seller meets the two-year ownership-and-use tests.

The portion of the profit subject to tax is based on the ratio of the time after 2008 when the house was a second home or a rental unit, to the total amount of time you owned it. So if you have owned a vacation home for 18 years and make it your main residence in 2013 for two years before selling it, only 10 percent of the gain (two years of nonqualified second home use divided by 20 years of total ownership) is taxed. The rest would qualify for the exclusion of up to $500,000.

For more information
For information on figuring out whether you have a gain or loss on the sale of your home, see IRS Tax Topic 703: Basis of Assets. For general information on the sale of your home, see IRS Publication 523: Selling Your Home, and Tax Topic 701: Sale of Your Home.
Keep in mind that this is general information designed to help you put these valuable deductions on your radar. Patrick Parker Realty Agents and Realtors are not certified accountants. Please be sure to check with your tax adviser to see if you qualify for a particular credit or deduction.
____________________________________________________________________________________

Follow The Patrick Parker Realty Tax Season Blog Series on Facebook and Twitter using #taxseasonblog.

Check back in with the Patrick Parker Realty Blog each Tuesday, Thursday and Saturday for more Tax Season Blog Series’ Posts and sign up for the monthly Patrick Parker Realty eNewsletter to have updates delivered to your inbox.

The Blog Series will cover many topics such as How do I qualify for a home seller break?, How do I qualify for a home buyer break?, Do I have to report the home sale on my return?, What is the gain on the sale of my home?, What Are Home Renovation Tax Credits?, Deducting Mortgage Interest, Taking the First-Time Homebuyer Credit, How to Avoid Taxes on Canceled Mortgage Debt, Tax Incentives as they relate to Life’s biggest transitions, such as Marriage, the Birth of a Baby, Divorce, or the death of a Spouse and much more. New posts in this Blog Series will be published twice weekly.

More info about the Patrick Parker Realty Tax Season Blog Series >

Tax Terms Glossary >

For more information about paying taxes on the sale or purchase of your home or any other questions you have about this article please speak with your tax professional or visit www.irs.gov.

Documents to Save From Your Home Closing

home-closing-documentsWhen you purchase a home, condo, or co-op, you will likely sign – and be sent home with – a mountain of documents. Should you keep these? On the whole, yes. They contain key information about your ownership, and in some cases will help you prove to the world (should the need ever arise) that the home is yours.

Let’s take a closer look at what you will likely receive. These will likely fall into two categories: documents relating to your mortgage loan (unless you paid all cash!) and documents relating to the transfer of the property itself.

Closing Documents Relating to Your Mortgage

Below is a summary of the main documents your lender will give you (most likely via your attorney or escrow/title agent).

RELATED: How does the Closing Process Work?

However, there may be more. For instance, your lender may ask you to sign an affidavit promising that you will live in, not rent out, the house.

  • Promissory note, or “Note.” You’re stating that you’re borrowing X amount of money and personally guaranteeing to repay it.
  • Mortgage or Deed of Trust. Here’s where you agree to have a lien put on your house as security for the loan. It turns your house into collateral, which the lender can claim in foreclosure if you fail to repay or to otherwise follow the terms of the Note (you “default”). The lender will record your mortgage with the appropriate local government office.
  • UCC-1 Financing Statement (co-ops only). Since co-op financing involves no mortgage, your lender may instead fill out and record this document, to show its claim on your property interest.
  • Truth-in-Lending (TIL) Disclosure Statement, or “Regulation Z form.” You should have seen an earlier draft of this, within three days after applying for the loan. Here, the lender will break down all the payments you’ll make in connection with your loan. It will confirm your interest rate, the annual percentage rate (“APR”), and the total cost of the loan over its life.
  • Closing Statement, Settlement Sheet, or HUD-1 Settlement Statement. This is the statement described above, usually prepared by your closing agent using a HUD-1 form. It itemizes each payment to be made by you and the seller, not only for the house, but for other costs such as services performed in connection with the sale, insurance premiums, paying off liens, and more. (The seller will need to sign it, too.) Before stuffing the HUD-1 statement into your files, check whether your closing agent included a refund check with it (for any extra money that you deposited ahead of time).
  • Monthly payment letter. This tells you how much money you’ll pay in monthly loan principal and interest. It may also include amounts that your lender requires you to put into escrow each month for payment to third parties such as the tax collector or insurance companies (homeowners’ or PMI). Your closing agent will take care of setting up this account on closing day.

Closing Documents Related to Transferring the Property

Another important set of closing documents serves to transfer the property to you. At a minimum, these include the items below, though others may be added depending on where you live, for example, to account for local transfer taxes.

RELATED: How Patrick Parker Realty Can Save You Money At Closing

Some documents you won’t even have to sign, you’ll just receive them from the seller: perhaps a certificate saying that the house has smoke detectors, or a certificate of occupancy showing that the house has passed a municipal or local inspection for basic habitability and legal compliance.

  • Deed (or “warranty deed”). The seller signs this to tell the world that title of the property has been transferred to you, the new owner. (The deed also states the purchase price, or enough information that the price can be figured out—which is how services like Zillow obtain this information.). Your closing agent will, as the last step in closing on the property, file a copy with the appropriate public records office.
    Co-op buyers only: Stock certificate and proprietary lease. Instead of a deed, co-op buyers receive a stock certificate indicating how many shares they own in the corporation and a proprietary lease outlining their rights to live in a certain unit. Your lender will probably keep these in its files.
  • Bill of sale. This document attests to the transfer of any personal property from the seller to you. In other words, if the sale includes any nonfixtures such as a children’s swing set, curtains, or a floor rug, the bill of sale creates a record of this agreement.
  • Affidavit of title and ALTA statement. Here, the seller swears to the title insurance company to have done nothing to cloud the house’s title and to know of no unrecorded contracts, easements, or leases regarding the property. The seller signs the affidavit, but both you and the seller sign the ALTA statement to finalize your request for title insurance.

RELATED: Six Mortgage Terms to Know

Once all the documents are signed, you will be given a complete set for your records. Keep everything in a safe place, such as a safe deposit box. Don’t assume that your closing company will keep a copy for you — they are allowed to toss most of your records after five to seven years.

Patrick Parker Realty is committed to making your home buying experience turn-key. Contact us today for more information.


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