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Tax Myths Continue to Surround Homeownership
By Kay Bell, bankrate.com | Published:
2/06/2008
Owning a home tops the dream list for most Americans,
and for plenty of good reasons. It's a shelter for your
family, a gathering place for your friends and a good
long-term investment.
Tax breaks are also frequently cited as motivation
for moving from renting to owning, and there are many
ways a home can cut your tax bill.
But, as is often the case with the U.S. tax code, homeownership
tax benefits are not always clear-cut. That frequently
leads to some bad information floating around.
While myths, half-truths and misconceptions may abound,
we've narrowed it down to a couple that, if you buy into
them, could cost you.
- My mortgage interest will reduce my tax bill.
This
is true for the majority of homeowners, but not
for all. And this tax break won't work forever.
To take
tax advantage of your home loan's interest, you must
itemize and come up with a total that
exceeds your standard amount. On 2007 tax returns,
the standard
deductions are $5,350 for single taxpayers, $7,850
for head of household filers and $10,700 for married
couples
who file jointly. These amounts increase a bit
each year to account for inflation.
" Given home prices these days, most owners are
itemizing," says Mark Luscombe, principal tax
analyst with CCH Inc. of Riverwoods, Ill. By the
time they count
mortgage interest, property taxes and other nonhome
deductions, such as state taxes and charitable
gifts, their itemized
totals easily surpass their allowable standard
deductions.
But most is not all.
Taxpayers who buy a home late in
the year, for instance, might find the standard deduction
is more beneficial,
at least initially, says Kathy Tollaksen, a CPA
at Sikich LLP in Aurora, Ill. In these cases, where
you make only
a few payments in a tax year, depending on your
loan you might not pay much interest, at least
not enough
to exceed standard amounts.
Timing also could reduce
or eliminate other home-related tax breaks.
" Quite a few states have real estate taxes that
are calculated in arrears. That is, they have already
been paid or mostly paid (by the seller) by the time
you buy," says Tollaksen. "In the first year,
you're seeing taxes that are someone else's responsibility
so you're not getting the full tax value of your
real estate taxes. "
The
benefit of mortgage interest also could be a myth if
you've lived in your home for a long time.
In this
case, you likely are paying more toward your
loan's principal instead of interest. So homeowners
at the end of a loan
term don't get much, if any, from this tax break.
Or,
as Bob D. Scharin, senior tax analyst and editor of Warren,
Gorham & Lamont/RIA's monthly tax journal "Practical
Tax Strategies," puts it, "Every deductible
expense you incur may not produce a deduction. "
-
All costs related to my home are deductible.
There
are no two ways about this one. It's flat-out false.
" Some buyers think, hope, they can write off everything
connected with the house," says Tollaksen. "Not
so. Association fees and property insurance costs
are not deductible. "
Neither,
in most cases, is private mortgage insurance, which
your lender probably required if your down
payment was less than 20 percent. However, a new
law changes
the deductibility of PMI for mortgages originated
or refinanced between Jan. 1, 2007, and Dec. 31,
2009.
If you got your mortgage and policy in that time
frame, you might be able to deduct your insurance
premium payments.
The law also extends beyond private insurance
to others, including FHA, VA and rural housing.
There
are some limits, though. The PMI deduction is phased
out for taxpayers with adjusted gross incomes
exceeding $100,000 and is totally eliminated
once AGI
reaches $110,000.
Don't try to deduct basic maintenance,
repair or home improvement costs either.
Tollaksen says, "I've
had people say, 'I put a new roof on my home; can I deduct
that?' No."
If you try to write off these expenses,
expect to hear from the Internal Revenue Service and
to pay a
higher
tax bill (and possible penalties and interest)
after you refigure your taxes without the disallowed
deductions.
However, you still need to keep track of
these expenses.
" If you convert the home to rental property or
sell it," she says, "these costs will affect
the property's tax basis. "
A
home's basis is critical when it comes time to sell.
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