Utah Home Mortgage Specialist

Points may be deducible by both buyers and sellers.

Picture a situation where a home is sold for $500,000 and the owner — to help close the sale — offers to pay 1 point for the buyer. If the property was financed with a $350,000 mortgage, a point would be worth $3,500. According to the IRS, “the seller cannot deduct these fees as interest. But they are a selling expense that reduces the amount realized by the seller.”

Interestingly, in this situation the buyer can also deduct the points when the home is sold.

“The buyer,” says the IRS, “reduces the basis of the home by the amount of the seller-paid points and treats the points as if he or she had paid them.”

In effect, the seller gets to write-off the $3,500 cost by reducing any profit from the sale. The buyer essentially lowers the purchase price of the property when the home is sold at some point in the future — thus increasing the size of any profit. However, since up to $500,000 in sale profits may be untaxed, most buyers will effectively never pay a tax on the seller’s contribution for points.

Points may be deducible when home is refinanced

If a primary residence is refinanced then the deal with points is different: The expense of a point must deducted over the life of the loan. If the home is sold before the loan term ends, then any undeducted cost for points can be used to reduce owner’s profit from the sale.

If you have purchased a home and have less than 20% equity in the property chances are you are required to pay for private mortgage insurance in conjunction with your regular home mortgage principle and interest payment.

Before you start thinking to yourself about all the drawback to paying for private mortgage insurance.  This column is not going to focus on the pros or cons. We are are just going to focus on the tax advantages if you find yourself with a mortgage that requires PMI.

The following information was taken directly from the IRS’s website:

In general, if you itemize deductions, you may deduct premiums paid for mortgage insurance provided by the Department of Veterans Affairs (VA), the Federal Housing Administration (FHA), the Rural Housing Service (Rural Housing), or private mortgage insurers in connection with a mortgage for the purchase of your main home. The amount you may deduct is limited if your adjusted gross income is more than $100,000 ($50,000 if married filing separately). No deduction is allowed if your adjusted gross income is more than $109,000 ($54,500 if married filing separately). See the instructions and worksheet for Schedule A, Line 13, to figure your deduction.

Box 4 of Form 1098 may show the total amount of premiums received from you in 2008. If you paid a lump-sum premium that pays for insurance for 2008 and later years, in most cases you must figure your deduction based only on the portion of the premium that pays for insurance for 2008. See Question 2 below if you paid a lump-sum premium that also covers years after 2008.

If you paid a lump-sum premium for insurance provided by FHA or a private mortgage insurer that also covers years after you purchased your home, you must determine the portion of the premium that pays for insurance for this tax year by dividing the total premium by the stated term (number of months) of your mortgage, or 84 months, whichever is shorter. Multiply that amount by the number of months during the tax year that your home was covered by the mortgage insurance. Enter the amount allocated to this tax year in the worksheet for Schedule A, Line 13, to figure your deduction for this tax year. You figure your deduction in later years based on the amounts allocated to those years. If your mortgage is satisfied before the end of your allocation period, you cannot deduct the amounts that are allocated to periods after the mortgage is satisfied.
If you paid a lump-sum premium for insurance provided by VA or Rural Housing, commonly known as a funding fee and guaranty fee respectively, no allocation is necessary, and you figure your deduction for this tax year based on the full amount of the payment. Enter the full amount in the worksheet for Schedule A, Line 13, to figure your deduction.

Make sure you check with a tax provider or CPA as to how this information applies directly to you.

Mortgage interest on home mortgage is generally deductible.

The IRS says there are three categories of deductible home mortgage interest:
Mortgages you took out on or before October 13, 1987 (called grandfathered debt).

Mortgages you took out after October 13, 1987, to buy, build, or improve your home (called home acquisition debt), but only if throughout 2005 these mortgages plus any grandfathered debt totaled $1 million or less ($500,000 or less if married filing separately).

Mortgages you took out after October 13, 1987, other than to buy, build, or improve your home (called home equity debt), but only if throughout 2005 these mortgages totaled $100,000 or less ($50,000 or less if married filing separately) and totaled no more than the fair market value of your home reduced by (1) and (2).
Substantial profits can be sheltered when a primary residence is sold.

When a primary residence is sold, up to $500,000 in profits can be sheltered from federal taxes if married, $250,000 if single, providing the home has been used as a prime residence for two of the past five years. Generally this deduction cannot be used more than once every two years, according to the IRS.

There are also provisions which may be helpful to individuals who must sell a primary residence in less than two years. Under the 2004 safe harbor rules, individuals may be able to get some capital gains relief under certain circumstances, such as being forced to move because a job has been relocated at least 50 miles or a home that must be sold because of multiple births resulting from the same pregnancy.

Also, individuals in the Armed Forces and the Foreign Service may be entitled to special consideration under the Military Family Tax Relief Act of 2003 (MFTRA). For instance, you may have longer to take a capital gains deduction or to amend a tax return. There are other provisions under MFTRA that also may be helpful, so check with a tax professional for specifics.

Let’s be honest: April 15th is a day of reckoning, the moment when we find out what we really owe for taxes. In households nationwide wallets are drained and many who were rich on the 14th are greatly impoverished by the 16th.

But for those with real estate the load is made lighter by tax rules which encourage the ownership of homes and investment property. Especially those with home mortgages.  Such rules are not only good for homeowners, they’re also good for the country: About 20 percent of all economic activity nationwide is related to real estate, so policies which encourage real estate activity help everyone.

It seems that almost every year changes to the tax code require the production of new forms and a re-education process. That said, the real estate basics remain in place and they’re good news for buyers, sellers, borrowers and owners.

We are going to cover several tax advantages to owning real estate in the days that follow.

Everyone has been talking a lot about the Federal Tax credits available to those who are purchasing a new home. Many people are out looking for homes simply because they want to qualify for the $6500 or $8000 available from the Federal Government.

As always with taxes, nothing is ever simple or easy.  The best advise I can give is to speak with a qualified tax professional for specific advice — an enrolled agent, a CPA or an attorney who specializes in tax issues. You can also go to www.irs.gov. 

But for those of you that are just needing a few simple questions answered from a reliable source, I would like to recommend an excellent website created by the National Association of Home Builders.  The website is http://www.federalhousingtaxcredit.com/index.html.  It has tons of information about the first-time homebuyer tax credit and the repeat buyer tax credit. 

Stay tuned over the next few days.  We will review the other tax advantages to owning both primary residences and investment properties.  With the real estate market bottoming out it is a great time to look at investing in rental properties.

Take care!