Taxes and Property

January is a time for new beginnings and resolutions coinciding with the onset of the new year. It also marks the beginning of the period when we begin to assemble all those documents needed for the dreaded April 15 deadline. As Mark Twain said, “only two things in life are certain, death and taxes”! 

For people who purchased or sold a home during the year, some of those costs are tax deductible. For people who own a home, both the interest on the note and the property taxes are deductible. Your lender will be sending you a 1098 form that indicates the interest paid for the taxable year. This amount is also reported by the lender to the Internal Revenue Service. 

Refinancing a loan during the year also brings tax benefits. If, in your refinancing, you changed lenders, you should receive 1098 forms from each lender detailing interest paid. If you paid discount points, a portion of those points is tax deductible. 

Bring the closing statement, otherwise known as the HUD-1 to your tax preparer. This details the costs involved in either purchasing or refinancing your home. 

Lender fees are indicated in lines 800 to 814; title or escrow company fees are on lines 1100 to 1116; fees paid to governmental agencies such as recording fees are shown on lines 1200 to 1205. If you used a real estate agent, the total sales brokers’ commissions are shown in lines 701 through 704, and items required by the lender to be paid in advance, other known as impounds, are detailed on lines 900-905. Impounded property taxes are shown here. 

All additional settlement charges such as back taxes, termite or other work performed, survey, home protection plan, septic pumping, reimbursements, etc. are shown on lines 1300 to 1311. Line 1400 is the total settlement charge. 

The Internal Revenue Service is a valuable web site and can provide answers to many questions as well as Publications regarding federal income taxes and property. 

To take advantage of the Tax Relief Act of 1997, you must have lived in your property two of the past five years in order to qualify for the $250,000 tax exclusion for single people and $500,000 for those people filing jointly. Those in the military or Foreign Service can qualify also for the tax exclusion also but have additional time beyond the five years. If you are thinking about renting your property, be sure and check with a tax advisor to make sure you do not jeopardize this exclusion. 

Questions regarding second homes, interest deductibility on second homes, home improvements added to the basis of the cost of your home, and the impact of bankruptcy and or foreclosure on federal income taxes are discussed on the IRS website. 

For people who own income producing property, Section 1031 of the Internal Revenue Service Code can help you maximize your profits if you sell property. This permits you to defer your capital gains tax to a later point in time, but you must reinvest in another property. Successful investors use 1031 Deferred Exchanges as a method to purchase more property with the same funds. 

As you prepare your taxes and think about your goals and objectives for the upcoming year. You may want to consider a real estate portfolio to provide a stream of income. Publication 550 discusses Investment Income and Expenses and may help you in your decision whether or not to invest in real estate. 

Other publications available on line include: Publication 936, Home Mortgage Interest Deduction; Publication 530, Tax Information for First-Time Homeowners; Publication 523, Selling your Home; Publication 551, Basis of Assets; Tax Topic 503, Deductible Taxes; and Tax Topic 505 Interest Expense. Form 1040 Schedule D is for Capital Gains and Losses. 

But remember, all questions regarding taxes should be referred to a tax professional.