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How do I save on taxes?
Here are some ways to save money on taxes:
Resources:
- "Tax Information for First-Time Homeowners," IRS Publication 530, and "Selling Your Home," IRS Publication 523. Call (800) TAX-FORM to order.
Tax credits for first-time home buyers
- Some credit may be claimed only on your owner-occupied principal residence.
- There are maximum income limits, which vary by locality and family size.
- You must be a first-time home buyer, which means you must not have had any kind of ownership interest in a principal residence during the past three years. This restriction may be waived, however, if you are buying property within certain target areas.
- Allocations must be available. A local MCC program may have to decline new applications when it runs out of funds.
Home mortgage deduction
- 521 "Moving Expenses"
- 523 "Selling Your Home"
- 527 "Residential Rental Property"
- 534 "Depreciation"
- 541 "Tax Information on Partnerships"
- 551 "Basis of Assets"
- 555 "Federal Tax Information on Community Property"
- 561 "Determining the Value of Donated Property"
- 590 "Individual Retirement Arrangements"
- 908 "Bankruptcy and Other Debt Cancellation"
- 936 "Home Mortgage Interest Deduction" Order by calling 1-800-TAX-FORM.
How do I reach the IRS?
To reach the Internal Revenue Service, call (800) TAX-1040.
Property taxes
Property taxes average 1.5 percent of the property's current market value. Property taxes on all real estate, including those levied by state and local governments and school districts, are fully deductible against current income taxes.
Appealing property taxes
Contact your local tax assessor's office to see what procedures to follow to appeal your property tax assessment. You may be able to appeal your assessment informally. Mostly likely, however, you will have to go through a formal tax-appeal processes, which begin with an appeal filed with the appropriate assessment appeals board.
What is an impound account?
If the buyer makes a small down payment (less than 20 percent of the purchase price, for example), many lenders impose property tax and insurance impound accounts. An impound account is a trust account established by the lender to hold money to pay for real estate taxes, and mortgage and homeowners insurance premiums as they are received each month.
Do all loans require impound accounts?
If you are taking out a FHA or VA loan, the lender can require an impound account to pay real estate taxes and hazard insurance premiums, as with a standard loan. Most conventional loans do not require an impound account.
How are fees and assessments figured in a homeowners association?
Homeowners association fees are considered personal living expenses and are not tax-deductible. If, however, an association has a special assessment to make one or more capital improvements, condo owners may be able to add the expense to their cost basis. Cost basis is a term for the money an owner spends for permanent improvements throughout their time in the home and is used to reduce eventual capital gains taxes when the property is sold. For example, if the association puts a new roof on a building, the expense could be considered part of a condo owner's cost basis only if they lived directly underneath it. Overall improvements to common areas, such as the installation of a swimming pool, need to be considered on a case-by-case basis but most can be included in the cost basis of any owner who can show their home directly benefits from the work.
To find out more about how the IRS views condo association fees, look to IRS Publication 17, "Your Federal Income Tax," which includes a section on condos. Order a free copy by calling (800) TAX-FORM.
The mortgage interest deduction entitles you to completely deduct the interest on your home loan for the year in which you paid it. You must itemize deductions in order to do this, which means your total deductions must exceed the IRS's standard deduction.
Another point to remember is that the amount of interest on your loan goes down each year you pay on your mortgage (all standard home-loan formulas pay off interest first before significantly paying into principal). That's why paying extra on your principal every year can help you pay off your loan early.
Are points deductible?
Points paid by the buyer or the seller are deductible for the year in which they are paid.
What home-buying costs are deductible?
Any points you or the seller pay for your home loan are deductible for that year. Property taxes and interest are deductible every year.
But while other home-buying costs (closing costs in particular) are not immediately tax-deductible, they can be figured into the adjusted cost basis of your home when you go to sell (any significant home improvements also can be calculated into your basis). These fees would include title insurance, loan-application fee, credit report, appraisal fee, service fee, settlement or closing fees, bank attorney's fee, attorney's fee, document preparation fee and recording fees.
Are taxes on second homes deductible?
Interest and property taxes are deductible on a second home if you itemize. Check with your accountant or tax adviser for specifics.
Are seller-paid points deductible?
As of Jan. 1, 1991, homeowners have been able to deduct points paid by the seller. This deduction previously was reserved only for points actually paid by the buyer.
Where do I get information on IRS publications?
The Internal Revenue Service publishes a number of real estate publications. They are listed by number:
Many city and county governments offer Mortgage Credit Certificate programs, which allow first-time home buyers to take advantage of a special federal income tax write-off, which makes qualifying for a mortgage loan easier. This program allows buyers credit in qualifying for the tax advantage they'll receive after they purchase the home.
Requirements vary from program to program. People wanting to apply should contact their local housing or community development office.
To qualify for a mortgage credit certificate, both your income and the purchase price of the home must fall within established city guidelines. These guidelines vary by city but generally only permit people who earn an average income or slightly higher than average income.
A limited number of cities have authorized the MCC program. Contact your municipal housing department for more information.
Here is a list of four general requirements to keep in mind:
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