10 most frequently forgotten real estate tax deductions:
Deduct those points. If you bought your principal residence last year and if you paid the lender a loan fee, usually called points, that fee is tax deductible as itemized interest on Schedule A of your return. But don’t count on your lender to include this fee on the IRS Form 1098 that reports annual interest paid. Some lenders report only your monthly interest payments, neglecting to remind you of the points you paid. (A point is 1 percent of the mortgage amount.) Your best proof that you paid this fee is the closing statement you received when the transaction was recorded. Refinance fees. If you refinanced your mortgage or obtained another type of real estate loan, any loan fee or points you paid can be deducted only over the life of the mortgage. Suppose you paid a $2,000 fee to refinance your 30-year mortgage. Rather than deduct the full $2,000, as you could when buying the house, all you can deduct is $66.67 annually for the next 30 years. For this reason, when refinancing a home mortgage, many borrowers get a so-called no-cost mortgage with no points. The general rule is that for each point paid, the interest rate should drop by one-eighth percentage point. To avoid the hassle of remembering to deduct the small loan fee amount each year for 15 or 30 years, many who refinance prefer to pay a slightly higher interest rate. Another reason to avoid paying points when refinancing is that most home loans are paid off in less than 10 years because the property is sold or refinanced again. For serial refinancers: If you refinanced a previously refinanced home loan, don’t forget to deduct any remaining loan fees from the first refi in the tax year of the second refi. Suppose you refinanced in 2004 and had $1,500 in undeducted loan fees from a prior refinance. That $1,500 is fully deductible as itemized interest on your 2004 return. Prepayment payback: Many home loans have penalties if they are paid off early, usually within the first three to five years. If you paid a prepayment penalty because you sold the home or refinanced, it is deductible as itemized interest. Money for moving: Whether you are a renter or a homeowner, you may qualify for the moving-cost deduction if you changed both your job site and your residence but were not reimbursed for household moving costs. This can be a big deduction, especially if you made a major cross-country move to take a new job. Use IRS Form 3903 to calculate and claim this deduction. To qualify, the distance from your old residence to your new job must be at least 50 miles farther from your old home than was your old job location. Suppose your old home was 3 miles from your old job location. If your new job site is at least 53 miles from your old home, you qualify. After you pass the distance test, you must be employed in the vicinity of your new job at least 39 weeks of the year. You need not work for the same employer. Either spouse can qualify. If you are self-employed, however, you must work in the vicinity of your new worksite at least 78 weeks during the next 24 months.
Casualty losses: If you suffered a sudden, unusual or unexpected loss, such as fire, flood, hurricane, tornado, earthquake, mudslide, theft, accident, water damage, riot, embezzlement, vandalism, snow, rain or ice storm but were not paid by insurance or other reimbursement, you may be able to claim a casualty loss deduction. Slow losses are not deductible. They include termite damage, dry rot, dry well, rust, corrosion, plant loss, moth damage, Dutch elm disease, erosion and mold. The casualty loss must exceed 10 percent of your adjusted gross income, plus a $100 “floor” per casualty event. Use IRS Form 4684 to calculate your deducible amount.
You will need proof of loss, such as your uninsured repair cost. Replacement estimates alone usually are not enough if you didn’t repair or replace. Property taxes: An easily forgotten deduction in the year of a home sale is your share of the pro-rated property taxes.
This deduction is usually paid to the local tax collector as part of the sale closing, so you might not have a canceled check or other proof of payment. Your closing settlement statement should show your pro-rated property tax share, based on the number of days you owned your home during the tax year. Pro-rated interest: If you bought your home in 2004 and assumed its existing mortgage, you are entitled to deduct your pro-rated interest share for the month the sale closed. Again, the buyer and seller’s shares are usually calculated on their closing statements even if the other party made the actual interest payment to the mortgage lender.
Pay now, save later: Millions of homeowners prepay their property taxes and mortgage payments each December even though these payments are not due until the next year.
The reason is these payments are deductible in the year they are made. Not all property tax collectors allow early payments, but many do. If you prepaid your January mortgage payment in late December, be sure your lender received the payment and included it on your IRS Form 1098. Ground rent: If your home is on leased land and if you have an option to buy that land, your ground rent payments may be deductible as itemized interest.
The IRS permits homeowners living on leased land to deduct their ground rent if these four conditions are met:
— The ground lease must be for at least 15 years, including renewal periods.
— The lease must be freely assignable to the buyer of your residence.
— The land owner’s interest must be primarily a security interest (like a mortgage).
— You have a current or future option to buy the land.
If your situation does not meet all four of these tests, your ground rent payments are not deductible. Although rarely forgotten, additional homeowner deductions include property taxes and mortgage interest. However, payments into an escrow impound account with a lender do not become deductible until the loan servicer remits the money to the tax collector. Most lenders include the deductible property tax and mortgage interest amounts on the borrower’s annual IRS Form 1098. Of course, if you pay your property taxes directly, without an escrow account, then your lender won’t include that amount on your Form 1098. If you were among the more than 12 million home buyers and sellers last year, you probably paid additional closing costs such as transfer tax, recording fees, escrow, title or attorney fees and other non-deductible expenses. Home buyers should add these nondeductible expenses to their purchase price cost basis for the house or condo. Sellers should subtract them as sales expenses from the home’s gross sales price. For full details on these and other homeowner and real estate investor tax benefits, consult your tax adviser. Reprints of the Robert Bruss series, “2005 Realty Tax Tips — Eight Chapters of Tax Savings for Homeowners and Investors,” are available for $4 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at (800) 736-1736 or by Internet download at http://www.bobbruss.com/.