- Important
Tax Information Regarding buying and/or Selling
A New Home
-
- Helpful
Links:
- Publication 936, Home Mortgage Interest Deduction (PDF 130K)
- Publication 523, Selling Your Home (PDF 194K)
- Publication 527, Residential Rental Property (PDF 187K)
- Publication 530, Tax Information for First-Time Homeowners (PDF 120K)
- Tax Topic 504 — Home Mortgage Points
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- 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.
- This section
explains what expenses you can deduct as a homeowner. It also points
out expenses that you cannot deduct. There are two primary discussions:
taxes and home mortgage interest. Generally, your real estate taxes and
home mortgage interest are included in your house payment.
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- 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.
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- 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.
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- Minister's or Military Housing Allowance
If you are a minister or a member of the uniformed services and
receive a housing allowance that is not taxable, you still can deduct
your real estate taxes and your home mortgage interest. You do not have
to reduce your deductions by your nontaxable allowance.
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- Nondeductible Payments
- You cannot deduct any of the following items.
- 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.
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- 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. If you own a
cooperative apartment, see Special Rules for Cooperatives, later.
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- Where To Deduct Real Estate Taxes
Enter the amount of your deductible real estate taxes on Schedule A (Form 1040), line 6.
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- Real Estate Taxes Paid at Settlement or Closing
Real estate taxes are generally divided so that you and the seller
each pay taxes for the part of the property tax year you owned the
home. Your share of these taxes is fully deductible, if you itemize
your deductions.
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- 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.
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- 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.
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- Example
- You bought your home on September 1. The property tax year (the period to which the tax relates) in your area is the calendar
year. The tax for the
year was $730 and was due and paid by the seller on August 15.
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- You owned your new home during the property tax year for 122 days (September 1 to December 31, including your date of purchase).
You figure your
deduction for real estate taxes on your home as follows.
- 1.
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- Enter the total real estate taxes for the real property tax year
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- $730
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- 2.
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- Enter the number of days in the property tax year that you owned the property
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- 122
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- 3.
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- Divide line 2 by 366
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- .3333
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- 4.
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- Multiply line 1 by line 3. This is your deduction. Enter it on Schedule
A (Form 1040), line 6
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- $243
|
- You can deduct $243 on your return for the year if you itemize your
deductions. You are considered to have paid this amount and can deduct
it on your return even if, under the contract, you did not have to
reimburse the seller.
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- Delinquent Taxes
Delinquent taxes are unpaid taxes that were imposed on the seller for
an earlier tax year. If you agree to pay delinquent taxes when you buy
your home, you cannot deduct them. You treat them as part of the cost
of your home. See Real estate taxes, later, under Cost as
Basis.
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- Escrow Accounts
Many monthly house payments include an amount placed in escrow (put
in the care of a third party) for real estate taxes. You may not be
able to deduct the total you pay into the escrow account. You can
deduct only the real estate taxes that the lender actually paid from
escrow to the taxing authority. Your real estate tax bill will show
this amount.
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- Refund or Rebate of Real Estate Taxes
If you receive a refund or rebate of real estate taxes this year for
amounts you paid this year, you must reduce your real estate tax
deduction by the amount refunded to you. If the refund or rebate was
for real estate taxes paid for a prior year, you may have to include
some or all of the refund in your income. For more information, see Recoveries in Publication 525, Taxable and Nontaxable Income.
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- Items You Cannot Deduct as Real Estate Taxes
- The following items are not deductible as real estate taxes:
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- Charges For Services An itemized charge for services to specific property or people is not
a tax, even if the charge is paid to the taxing authority. You cannot
deduct the charge as a real estate tax if it is:
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- A unit fee for the delivery of a service (such as a $5 fee charged for every 1,000 gallons of water you use),
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- A periodic charge for a residential service (such as a $20 per month or $240 annual fee charged for trash collection), or
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- A flat fee charged for a single service provided by your local government (such as a $30 charge for mowing your lawn because
it had grown
higher than permitted under a local ordinance).
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- Tax
Tips For Refinancing
Your Home
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- Tax Tip 2005-56, March 21, 2005
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- Taxpayers who refinanced their homes may be eligible to deduct some costs associated with their loans.
- Generally, for taxpayers who itemize, the “points” paid to obtain a
home mortgage may be deductible as mortgage interest. Points paid to
obtain an original home mortgage can be, depending on circumstances,
fully deductible in the year paid. However, points paid solely to
refinance a home mortgage usually must be deducted over the life of the
loan.
-
- For a refinanced mortgage, the interest deduction for points is
determined by dividing the points paid by the number of payments to be
made over the life of the loan. This information is usually available
from lenders. Taxpayers may deduct points only for those payments made
in the tax year. For example, a homeowner who paid $2,000 in points and
who would make 360 payments on a 30-year mortgage could deduct $5.56
per monthly payment, or a total of $66.72 if he or she made 12 payments
in one year.
- However, if part of the refinanced mortgage money was used to
finance improvements to the home and if the taxpayer meets certain
other requirements, the points associated with the home improvements
may be fully deductible in the year the points were paid. Also, if a
homeowner is refinancing a mortgage for a second time, the balance of
points paid for the first refinanced mortgage may be fully deductible
at pay off.
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- Other closing costs — such as appraisal fees and other non-interest
fees — generally are not deductible. Additionally, the amount of
Adjusted Gross Income can affect the amount of deductions that can be
taken.
- For more information on deductions related to refinancing, look up
Frequently Asked Questions (keyword: refinancing fees) or Tax Topics
504, Home Mortgage Points, and 505, Interest Expenses, on this Web site.
- Other tax information on residential real estate can be found in IRS
Publications 936, Home Mortgage Interest Deduction; 523, Selling Your
Home; 527, Residential Rental Property; and 530, Tax Information for
First-Time Homeowners. All publications are available on this Web site
or by calling toll free 1-800-TAX FORM (1-800-829-3676).
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- How To Get Tax Help
- You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get more information
from the IRS in several
ways. By selecting the method that is best for you, you will have quick and easy access to tax help.
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- Contacting Your Taxpayer Advocate
- If you have attempted to deal with an IRS problem unsuccessfully, you
should contact your Taxpayer Advocate.
-
- The Taxpayer Advocate independently
represents your interests and concerns within the IRS by protecting
your rights and resolving problems that have not been fixed through
normal channels. While Taxpayer Advocates cannot change the tax law or
make a technical tax decision, they can clear up problems that resulted
from previous contacts and ensure that your case is given a complete
and impartial review.
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- To contact your Taxpayer Advocate:
- Call the Taxpayer Advocate toll free at
1-877-777-4778.
- Call, write, or fax the Taxpayer Advocate office in your area.
- Call 1-800-829-4059 if you are a
TTY/TDD user.
- Visit
www.irs.gov/advocate.
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- For more information, see Publication 1546, The Taxpayer Advocate
Service of the IRS—How To Get Help With Unresolved Tax Problems.
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- Free Tax Services
- To find out what services are available, get Publication 910, IRS
Guide to Free Tax Services. It contains a list of free tax publications
and an index of tax topics. It also describes other free tax
information services, including tax education and assistance programs
and a list of TeleTax topics.
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