Wednesday, March 14, 2001

Homeownership opens the door to tax breaks

Whether you buy a single-family house, town house, or condo, it may open the door to new tax savings.

The Georgia Society of CPAs explains some of the tax breaks associated with homeownership, making "Home Sweet Home" seem just a little sweeter for home buyers.

The biggest tax savings available to the majority of homeowners come from mortgage interest. Each year, taxpayers who itemize can deduct interest paid on up to $1 million in mortgage debt incurred.

In addition, the interest you pay on up to $100,000 of home equity debt is also fully deductible, regardless of how you use the funds. Even late-payment fees assessed by your lender are deductible. Keep in mind that these tax deductions and certain other itemized deductions are phased out for some high-income taxpayers.

If you paid $600 or more in mortgage interest during the year, you should receive Form 1098, Mortgage Interest Statement. Box one on the statement shows the total interest paid on your mortgage during the year and should reflect the interest you paid at settlement.

If it does not, add the amount of mortgage interest from your settlement statement to the amount shown on Form 1098, report the total on Schedule A, and attach a note to your return explaining the difference.

The amount shown in box two on Form 1098 represents the amount of points paid. The term "points" is used to describe certain charges you pay to the lender upon taking out the loan. Each point is equal to 1 percent of the loan's value and is treated as prepaid interest under the tax law. In most cases, points are fully deductible by the buyer in the year they are paid, regardless of whether the buyer or seller paid the points.

While real estate taxes can add substantially to your monthly mortgage payment, the amount you pay to local and state authorities is fully deductible (subject to high-income phase-out rules). Many lenders include in monthly statements an amount placed in escrow for real estate taxes. Your deduction for real estate taxes is equal to the amount the lender actually paid from escrow to the taxing body. Be aware that this amount may be more or less than what you contributed to escrow during the year.

If you live in a state that participates in the Mortgage Credit Certificate Program, designed to help low­income buyers afford homeownership, you may be able to claim a tax credit up to a maximum of $2,000, rather than a deduction for part of the mortgage interest you pay.

To be eligible for the credit, you must obtain a mortgage credit certificate from your local or state government before you obtain a mortgage. To claim this credit, complete Form 8396 and attach it to your Form 1040. Contact your state or local housing finance agency for information about the availability of MCCs in your area.

If you've just bought your home, selling it may be the furthest thought from your mind right now. However, it's nice to know that, when it comes time to sell, there's another great tax break awaiting you. You can exclude up to $500,000 in gains from the sale of your home if you're married and file jointly ($250,000 for single taxpayers and married taxpayers filing separately), provided that you have owned and resided in the home as your principal residence for at least two of the prior five years before the sale.

Finally, CPAs point out that it's important for homeowners to keep accurate records documenting improvements made to their homes. That's because the costs of certain home improvements can be used to offset capital gains realized on the sale of your home.

The GSCPA is the premier professional organization for CPAs

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