Hi heavylee,
Congratulations on your purchase! Not only have you started to build
up equity for yourselves, but you will benefit from some tax
deductions.
What other expenses can be reasonably written off?
Real Estate Tax / Mortgage Interest / Loan Points / Some Moving Costs
Are any of the closing costs able to be?
No but see "Cost as Basis".
My payment to the seller reimbursing him for real-estate or school taxes?
Yes but only from the date of sale onward.
Settlement for the house was Dec 29, 2005, so no home improvements
I've made (EnergySTAR upgrades) can go on this year's filing, right?
That's right.
The IRS Publication 530, Tax Information for First-Time Homeowners
will answer all of your questions. I've copied and pasted a few
relevant sections below but please click on the link for full details.
# What You Can and Cannot Deduct
"To deduct expenses of owning a home, you must file Form 1040 and
itemize your deductions on Schedule A (Form 1040). If you itemize, you
cannot take the standard deduction. See the Form 1040 instructions if
you have questions about whether to itemize your deductions or claim
the standard deduction."
>>>Your house payment.
"If you took out a mortgage (loan) to finance the purchase of your
home, you probably have to make monthly house payments. Your house
payment may include several costs of owning a home. The only costs you
can deduct are real estate taxes actually paid to the taxing authority
and interest that qualifies as home mortgage interest. These are
discussed in more detail later."
** You cannot deduct any of the following items.
"Here are some expenses, which may be included in your house
payment, that cannot be deducted.
* Fire or homeowner's insurance premiums.
* FHA or other mortgage insurance premiums.
* The amount applied to reduce the principal of the mortgage.
Nondeductible payments.
* Insurance, including fire and comprehensive coverage, and title
and mortgage insurance.
* Wages you pay for domestic help.
* Depreciation.
* The cost of utilities, such as gas, electricity, or water.
* Most settlement costs. See Settlement or closing costs under
Cost as Basis, later, for more information."
>>>Real Estate Taxes
"Most state and local governments charge an annual tax on the value of
real property. This is called a real estate tax. You can deduct the
tax if it is based on the assessed value of the real property and the
taxing authority charges a uniform rate on all property in its
jurisdiction. The tax must be for the welfare of the general public
and not be a payment for a special privilege granted or service
rendered to you."
Deductible Real Estate Taxes
"You can deduct real estate taxes imposed on you. You must have paid
them either at settlement or closing, or to a taxing authority (either
directly or through an escrow account) during the year."
>>> Sales Taxes
"Generally, you can elect to deduct state and local general sales
taxes instead of state and local income taxes as an itemized deduction
on Schedule A (Form 1040). Deductible sales taxes may include sales
taxes paid on your home (including mobile and prefabricated), or home
building materials if the tax rate was the same as the general sales
tax rate. For information on figuring your deduction, see the
Instructions for Schedule A (Form 1040).
Caution
If you elect to deduct the sales taxes paid on your home, or home
building materials, you cannot include them as part of your cost basis
in the home."
>>> Home Mortgage Interest
Mortgage Interest Paid at Settlement
"One item that normally appears on a settlement or closing statement
is home mortgage interest.
You can deduct the interest that you pay at settlement if you itemize
your deductions on Schedule A (Form 1040). This amount should be
included in the mortgage interest statement provided by your lender.
See the discussion under Mortgage Interest Statement, later. Also, if
you pay interest in advance, see Prepaid interest, earlier, and
Points, next."
>>> Points
"The term 'points' is used to describe certain charges paid, or
treated as paid, by a borrower to obtain a home mortgage. Points also
may be called loan origination fees, maximum loan charges, loan
discount, or discount points.
A borrower is treated as paying any points that a home seller pays for
the borrower's mortgage. See Points paid by the seller, later."
>>> Amounts charged for services.
"Amounts charged by the lender for specific services connected to the
loan are not interest. Examples of these charges are:
* Appraisal fees,
* Notary fees,
* Preparation costs for the mortgage note or deed of trust,
* Mortgage insurance premiums, and
* VA funding fees.
You cannot deduct these amounts as points either in the year paid or
over the life of the mortgage. For information about the tax treatment
of these amounts and other settlement fees and closing costs, see
Basis, later."
>>> Cost as Basis
"The cost of your home, whether you purchased it or constructed it, is
the amount you paid for it, including any debt you assumed.
The cost of your home includes most settlement or closing costs you
paid when you bought the home. If you built your home, your cost
includes most closing costs paid when you bought the land or settled
on your mortgage."
http://www.irs.gov/publications/p530/index.html
Additional Links of Interest
Your Home as a Tax Shelter: Top Ten Tax Deductions for Owning Your Home
1. Mortgage Interest
2. Points
3. Equity Loan Interest
4. Home Improvement Loan Interest
5. Property Taxes
6. Home Office Deduction
7. Selling Costs and Capital Improvements
8. Capital Gains Exclusion
9. Moving Costs
10. Mortgage Tax Credit
http://www.nolo.com/article.cfmcatId/B610DF8A-B9F2-429A-8B9B77A2E203513F/objectId/3F35969D-53CE-4A1B-B44FFDD737610F63/213/243/AT/
Top 10 Deductions for Homeowners
1. Deductible Mortgage Interest
2. Tax-Breaks for Home Refinancers
3. Deductible Loan Points for Homebuyers
4. No Income Taxes On Capital Gains
5. Home Improvements
6. Real Estate and Property Taxes
7. Home Office
8. Limited Moving Expense
9. Health-Related Improvements
10. Vacation Homes
http://www.quickenloans.com/mortgage/articles/buying_home/top_ten_deductions.html
Tax Benefits of Buying a Home
"This calculator estimates the tax benefit of buying a home. Input
your loan parameters and the month you purchased the home. Since home
interest and points are captured in itemized deductions, please
estimate your Schedule A itemized deductions. Your itemized deductions
including your mortgage deductions will be compared to your standard
deduction to calculate the tax benefit of purchasing your home."
http://www.quickenloans.com/mortgage/home_buying_calculators/tax_savings_calculator.html?lid=286
I hope this helps you to see your way through the IRS maze a bit. If
you have any questions, please post a clarification request and wait
for me to respond before closing/rating my answer.
Thank you,
hummer
Search strategy: I searched the IRS website. I also searched Google
using the terms: home tax deductions |
Clarification of Answer by
hummer-ga
on
04 Mar 2006 17:48 PST
Hi heavylee,
1. All amounts paid in 2005 of mortgage interest are deductible. Correct?
Yes, as long as you use Schedule A and your mortgage is less than $1 million (!).
Usually, you can deduct the entire part of your payment that is for
mortgage interest, if you itemize your deductions on Schedule A (Form
1040). However, your deduction may be limited if:
* Your total mortgage balance is more than $1 million ($500,000 if
married filing separately), or
* You took out a mortgage for reasons other than to buy, build, or
improve your home.
http://www.irs.gov/publications/p530/ar02.html#d0e569
2. All property taxes paid by me directly to government are deductible. Correct?
Yes, given the following criteria.
Most state and local governments charge an annual tax on the value of
real property. This is called a real estate tax. You can deduct the
tax if it is based on the assessed value of the real property and the
taxing authority charges a uniform rate on all property in its
jurisdiction. The tax must be for the welfare of the general public
and not be a payment for a special privilege granted or service
rendered to you.
You can deduct real estate taxes imposed on you. You must have paid
them either at settlement or closing, or to a taxing authority (either
directly or through an escrow account) during the year.
http://www.irs.gov/publications/p530/ar02.html#d0e285
3. Are amounts paid to the seller during settlement reimbursing him
for his prepayment of these real estate taxes deductible? If I
understand correctly, they are not.
Actually, they are. You didn't even have to reimburse the seller to
qualify for the deduction of your share.
Division of real estate taxes. For federal income tax purposes, the
seller is treated as paying the property taxes up to, but not
including, the date of sale. You (the buyer) are treated as paying the
taxes beginning with the date of sale. This applies regardless of the
lien dates under local law. Generally, this information is included on
the settlement statement you get at closing.
You and the seller each are considered to have paid your own share of
the taxes, even if one or the other paid the entire amount. You each
can deduct your own share, if you itemize deductions, for the year the
property is sold.
http://www.irs.gov/publications/p530/ar02.html#d0e285
4. What moving expenses are deductible? I was not able to see in the
IRS document where it mentions this.
Sorry, although you hadn't asked about it, I thought I'd add it in
case you didn't know about it. I should've included a link to Pub 521
for you.
Publication 521 (2005), Moving Expenses
http://www.irs.gov/publications/p521/
As long as you read the IRS Pubs thoroughly, you should be fine. You
can always call them if you have any questions.
Asking tax questions. Call the IRS with your tax questions at 1-800-829-1040.
http://www.irs.gov/publications/p521/ar02.html#d0e2611
Regards,
hummer
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