Tax Considerations

Tax Considerations

Where can I find details on IRS publications?

Numerous publications related to real estate are released by the Internal Revenue Service. Their numbers are mentioned below:

  • 521 "Moving Expenses"
  • 523 "Selling Your Home"
  • 527 "Residential Rental Property"
  • 534 "Depreciation"
  • 541 "Tax Information on Partnerships"
  • 551 "Basis of Assets"
  • 555 "Federal Tax Information on Community Property"
  • 561 "Determining the Value of Donated Property"
  • 590 "Individual Retirement Arrangements"
  • 908 "Bankruptcy and Other Debt Cancellation"
  • 936 "Home Mortgage Interest Deduction"

Order by calling 1-800-TAX-FORM.


Are points paid by the seller deductible?

Homeowners have been permitted to deduct points paid by the seller since January 1, 1991. Previously, only points that the customer had really paid for may be deducted.


A clean, modern kitchen that opens into a dining area

When is the ideal time to buy?

Here are a few widely mentioned justifications for home purchases:

  • You require a tax credit. Owning a home can be a very enticing option thanks to the mortgage interest deduction.
  • You do not anticipate a short-term price increase.
  • The monthly payments are within your means.
  • You intend to occupy the property long enough for the appreciation to make up for your closing costs. Real estate commissions, loan fees, and closing charges that can total more than 10% of the sales price are included in the costs of purchasing and selling a home.
  • You would rather own a home than rent one.
  • The headaches and maintenance costs are manageable.
  • Home value drops don't really worry you.


Which expenses incurred while purchasing a home are tax deductible?

For that year, you may subtract any points you or the seller pay to buy your mortgage. Interest and real estate taxes are both deductible annually. However, even while closing expenses in particular are not immediately tax deductible, you can include them in your home's adjusted cost basis when you seek to sell it (any significant home improvements also can be calculated into your basis). Title insurance, loan application fees, credit report fees, appraisal fees, service fees, settlement or closure costs, bank attorneys' fees, legal costs, document preparation costs, and recording costs are some of these expenses. When you refinance an existing mortgage, the points you paid must be subtracted ratably throughout the course of the new loan.


What does the Mortgage Credit Certificate program consist of?

A unique federal income tax credit is available to first-time home buyers through the Mortgage Credit Certificate program. With the help of this program, buyers can qualify for the tax break they'll get if they buy a house. Every city having an MCC program is required to use the same local methodology to determine the credit amount. A MCC credit, which can be worth up to $2,000, lowers the borrower's federal tax obligation by a sum that is correlated to the amount of annual mortgage interest paid. Both the borrower's income and the home's purchasing price must adhere to predetermined standards. Contact the housing or redevelopment agency in your area to find out if your community offers an MCC program. You might also get information from your local Realtor association or your real estate broker.


What are the guidelines for mortgage credit certificates?

Your income and the cost of the home must both be within the set city limits in order to be eligible for a mortgage credit certificate. These regulations vary by city but often only allow those with average or slightly above average incomes. Only a few cities have approved the MCC program. For further details, speak with the housing department of your local government.


Is buying a vacation home a good idea?

Today, buying a vacation property can be done for both leisure and investment. There are tax advantages, indeed. Some buyers purchase a vacation house with the intention of later converting it into a permanent residence for retirement, putting them ahead on their payments. Tax deductions for interest and real estate taxes are an additional benefit that lowers the overall cost of owning a second home. A vacation property can also lose value if you occupy it for fewer than 14 days annually, or 10% of the days it is rented out, whichever is higher.


  • "Real Estate Investing From A to Z," William Pivar, Probus Publishing, Chicago; 1993.
  • "The Ultimate Language of Real Estate," John Reilly, Dearborn Financial


How can I reduce my tax obligations?

Here are some strategies for reducing your tax bill:

  • Mortgage interest paid to purchase, build, or improve your primary dwelling and a second home is fully deductible for the year it is paid on loans up to $1 million.
  • No matter if the buyer or the seller pays the points, commonly known as loan origination fees, they are still tax deductible.
  • The majority of homeowners, with the exception of the wealthy and those who reside in expensive areas, are no longer concerned about capital gains taxes. For married couples and single owners, the exemption has been increased to $500,000 and $250,000, respectively. It is possible to take it every two years.

Homeowners should always keep all receipts of permanent home improvements and of mortgage closing costs. If you do have to pay capital gains taxes, these costs can be added to your adjusted cost basis. Consult your tax adviser for more information.


  • "Tax Information for First-Time Homeowners," IRS Publication 530, and "Selling Your Home," IRS Publication 523. Call (800) TAX-FORM to order.


Are second residences' taxes deductible?

If you itemize your deductions, you can deduct mortgage interest and property taxes on a second residence. For more information, consult your accountant or tax advisor.


Are points deductible?

In the event that you are a buyer and the seller or you pay the points, they are only deductible in the year in which they are made. When you refinance your house, you can also write off whatever points you paid, but you must do it proportionally over the course of the loan. Ask your tax or financial counselor for advice.


How do you decide whether to buy or rent?

Owning a house gives you the opportunity to make decisions regarding your space as well as tax advantages. Renters benefit from not having to worry about upkeep and other costs related to property ownership. A variety of economic factors are also present. In contrast to renters, homeowners who obtain a fixed-rate loan may fix their monthly housing expenditures and make wise investment decisions because they know these costs won't increase significantly. Owning a home is a highly leveraged investment that can generate significant returns on a little initial outlay. Such gains, however, are reliant on property price growth.

Mitchell A. Levy states in his book "Home Ownership: The American Myth," published by Myth Breakers Press in Cupertino, California, in 1993, "For some people, having a home is a terrific experience. "However, there is a cost. In addition to the hassle of upkeep, Levy adds, "the amount of after-tax money given to the lender is typically more than the amount of money paid in rent otherwise. In their book "The Buy & Hold Real Estate Strategy," published by John Wiley & Sons in 1992, David T. Schumacher and Erik Page Bucy claim that "excellent property located in growth areas should be seen as an investment as opposed to a speculation or gamble." The authors advise potential purchasers to research a community for a few months before making a purchase. A common error is buying in the incorrect location. The authors state that "just because particular features are expensive doesn't necessarily indicate they have some intrinsic advantage." "One property may be more expensive than another right now, but will it continue to be more valuable in the future?"


Do first-time home purchasers qualify for tax credits?

Numerous municipal and county governments provide Mortgage Credit Certificate programs, enabling first-time homebuyers to benefit from a unique federal income tax write-off that makes it simpler for them to qualify for a mortgage loan. The specifications differ between programs. People who want to apply can get in touch with their neighborhood community or housing agency. Four general requirements to remember are listed below:

  • Only your principal residence that is owned and occupied may be used to claim some credits.
  • There are monetary ceilings that change depending on the location and size of the household.
  • You need to be a first-time home buyer, which means you can't have owned a principal house in any capacity in the three years prior. However, if you purchase a property in one of the designated target locations, this restriction can be eliminated.
  • There must be allocations available. When funds are low, a local MCC program may have to turn down new submissions.


What is the home mortgage deduction?

You have the right to fully deduct the interest on your mortgage for the year that it was paid thanks to the mortgage interest deduction. Mortgage interest lowers taxable income, not taxes, on a dollar-for-dollar basis. This requires itemizing deductions, which means that your overall deductions must be more than the IRS standard deduction. Another thing to keep in mind is that when you make mortgage payments, the amount of interest on your loan decreases (all standard home-loan formulas pay off interest first before significantly paying into principal). Paying more than the minimum amount due on your principle each year will enable you to pay off your loan sooner.


How are assessments and fees calculated in a homeowners association?

Homeowners association dues are regarded as non-deductible personal living expenses. However, condo owners might be able to add the cost to their cost basis if an association has a special assessment for one or more capital improvements. Cost basis refers to the money an owner invests in long-term home upgrades and is used to offset future capital gains taxes owed when the property is sold. For instance, if an association replaces a building's roof, only a condo owner who resided directly underneath the building may use the cost as part of their cost basis. A case-by-case analysis is required when considering overall upgrades to common areas, such as the construction of a swimming pool, but for the most part, any owner who can demonstrate that their property directly benefits from the work can include the costs in their cost basis.

To find out more about how the IRS views condo association fees, look to IRS Publication 17, “Your Federal Income Tax,” which includes a section on condos. Order a free copy by calling (800) TAX-FORM.


How can I contact the IRS?

To reach the Internal Revenue Service, call (800) TAX-1040.

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