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Cheralyn Whetstone & Team Agents
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Homeowner tax perks

One of the best things about owning a home is that you can deduct many home-related expenses when it comes to file your federal income tax return.

These tax breaks are available for any abode -- mobile home, single-family residence, town house, condominium or cooperative apartment.

For many homeowners, the effort of itemizing is well worth it at tax time. Some, however, might find that claiming the standard deduction remains their best move. How do you decide? First, find your standard deduction amount, based on your filing status: $5,000 for taxpayers who are single or married but filing separately; $7,300 for heads of households; and $10,000 for married couples who file joint returns. Then compare it to the total expenses you can itemize and file using the method that gives you the larger deduction.

Mortgage interest
Your biggest tax break is reflected in the house payment you make each month since, for most homeowners, the bulk of that check goes toward interest. All that interest is deductible, unless your loan is more than $1 million. If you're the proud owner of a multimillion-dollar mortgaged mansion, the Internal Revenue Service will limit your deductible interest.

Interest tax breaks don't end with your home's first mortgage. If you took advantage of low rates and your real estate's growing value to pull out extra cash through refinancing, or decided, instead, to get a home equity loan or line of credit, that interest is also deductible, within IRS guidelines.

Generally, equity debts of $100,000 or less are fully deductible. But even then, the remaining amount of your first mortgage could restrict your tax break. This could be a concern if you excessively leverage your house.

When a homeowner takes out an equity loan that, when combined with the first mortgage amount, increases the debt on the house to an amount more than the property's actual value, the homeowner faces additional deductibility limits. In these cases, the IRS says you can deduct the smaller of interest on a $100,000 loan or your home's value less the amount of your existing mortgage.

What if your real estate circumstances are a bit brighter? Say, for instance, you're able to swing a vacation home on the lake. You're in tax luck. The mortgage interest on a second home is fully deductible. In fact, your additional property doesn't have to strictly be a house. It could be a boat or RV, as long as it has cooking, sleeping and bathroom facilities. You can even rent out your second property for part of the year and still take full advantage of the mortgage interest deduction as long as you also spend some time there.

But be careful. If you don't vacation at least 14 days at your second property, or more than 10 percent of the number of days that you do rent it out (whichever is longer), the IRS could consider the place a residential rental property and axe your interest deduction.

Did you pay points to get a better rate on any of your various home loans? They offer a tax break, too. The only issue is exactly when you get to claim it.

The IRS lets you deduct points in the year you paid them if, among other things, the loan is to purchase or build your main home, payment of points is an established business practice in your area and the points were within the usual range. Make sure your loan meets all the qualification requirements so that you can deduct points all at once.

A homeowner who pays points on a refinanced loan is also eligible for this tax break, but in most cases the points must be deducted over the life of the loan. So if you paid $2,000 in points to refinance your mortgage for 30 years, you can deduct $5.56 per monthly payment, or a total of $66.72 if you made 12 payments in one year on the new loan.

If the refinancing frees up cash, and you then use it to improve your house, you can fully deduct points on that money in the year you paid the points. The same rule applies to home equity loans or lines of credit. When the loan money is used for work on the house, securing the loan, the points are deductible in the year the loan is taken out. If you use the extra cash for something else, such as buying a car, you still can deduct the points but not completely on one tax return. The points deductions must be parceled out over the equity loan's term.

Remember: It's only the portion of the points related to refi money you used for home improvement that is eligible for immediate tax-deduction purposes. The points attributable to the refinanced existing mortgage balance still must be amortized over the life of the refinanced loan.

And points paid on a loan secured by a second home or vacation residence, regardless of how the cash is used, must be amortized over the life of the loan.

The other major deduction in connection with your home is property taxes.

A big part of most monthly loan payments is taxes, which go into an escrow account for payment once a year. This amount should be included on the annual statement you get from your lender, along with your loan interest information. These taxes will be an annual deduction as long as you own your home.

But if this is your first tax year in your house, dig out the settlement sheet you got at closing to find additional tax payment data. When the property was transferred from the seller to you, the year's tax payments were divided so that each of you paid the taxes for that portion of the tax year during which you owned the home. Your share of these taxes is fully deductible.

A word of caution: If your settlement statement shows any money you paid into an escrow account for future taxes, this amount is not deductible. You can only deduct the taxes in the year your lender actually pays them to the property tax collector.

When you sell
When you decide to move up to a bigger home, you'll be able to avoid some taxes on the profit you make.

Years ago, to avoid paying tax on the sale of a residence a homeowner had to use the sale proceeds to buy another house. In 1997, the law was changed so that up to $250,000 in sales gain ($500,000 for married joint filers) is tax-free as long as the homeowner owned the property for two years and lived in it for two of the five years before the sale.

If you sell before meeting the ownership and residency requirements, you owe tax on any profit. The IRS provides some tax relief if the sale is because of a change in the owner's health, employment or unforeseen circumstances. In these cases, the tax-free gain amount is prorated.

A ruling by the IRS in late 2002 could put more dollars in homeowners' pockets when they must sell before they qualify for the full tax break. The Treasury has defined the unforeseen circumstances that often force homeowners to sell and under which they now can get some tax relief.

A partial exclusion can be claimed if the sale was prompted by residential damage from a natural or man-made disaster or the property was "involuntarily converted," for example, taken by a local government under eminent domain law.

What's not deductible
While many tax breaks are available to a homeowner, don't get too carried away. There are still a few things for which you have to bear the full cost.

One such expense is insurance. If you pay private mortgage insurance because you weren't able to come up with a large enough down payment, that's a cost you can't write off at tax time. Neither can you deduct your property insurance premiums, even though the coverage generally is required as part of the home loan and is included as a portion of your monthly payment.

Other nondeductible residential expenses include homeowner association dues, any additional principal payments you make, depreciation of your home, general closing costs and local assessments to increase the value of your neighborhood, such as construction of new sidewalks or utility connections.

What about all those repairs that seem to crop up the day after you move in? Surely they're tax deductible. Sorry. While they'll make your house much more comfortable, you're on your own here, too.

But hold onto the receipts. In today's hot real estate market, some homeowners may find their property will appreciate beyond the $250,000 ($500,000 for married couples) amount the IRS will let you keep tax free when you sell. If that happens, the records of property improvements could help you establish a higher basis for your house and reduce your taxable profit.


Quarterly home prices decline for first time in 13 years

A typical American house lost value in the third quarter of this year. It was the first quarterly price drop in 13 years. Half of the nation's single-family houses sold for more than $224,900 from July through September, according to the National Association of Realtors. During the same quarter a year earlier, in 2005, half of houses sold for more than $227,600. Those figures represent a 1.2 percent decline in the median price in one year.

Of 148 metropolitan areas, prices took the biggest hit in Greater Detroit, where the median price fell 10.5 percent in a year, to $154,100 from $172,100. Detroit was followed by Greater Sarasota, Fla., where the median price fell 9.4 percent; Canton-Massillon, Ohio, where they fell 9.2 percent; Palm Bay-Melbourne-Titusville, Fla., down 9 percent, and Bloomington-Normal, Ill., where the median price slipped 8.5 percent.

The median price fell in 45 of the 148 metropolitan areas. Many of those metro areas were Rust Belt cities where manufacturing jobs continue to shrink: Akron, Toledo and Cleveland, Ohio; South Bend, Indianapolis and Fort Wayne, Ind.; Lansing and Grand Rapids, Mich. Some declining metro areas were the epicenters of bursting real-estate bubbles: Fort Myers, Miami, Fort Lauderdale, and Pensacola, Fla.; Sacramento, San Diego and Orange County, Calif., and Boston.

Nationally, the last time the quarterly price had fallen was the first quarter of 1993, when it dropped 0.04 percent -- to $103,500, compared to $103,900 a year earlier.

A cheery outlook
The National Association of Realtors tried to draw a happy face on the data. "Conditions for home buyers improved during the third quarter as existing single-family home prices in many metropolitan areas experienced corrections," the trade group said in a news release. It added that in most states, there was a decline in the number of houses sold.

That's a turnaround from whirlwind sales activity and spiraling home sales just a year ago. David Lereah, the Realtors' chief economist, says the market is "in full transition," with sellers more willing to negotiate. "We expect this trend to continue in the months ahead, but we'll see modest appreciation in most of the country in 2007."

Actually, there was modest appreciation in most of the country in the third quarter of 2006, too. Of 148 metropolitan areas, prices went up in 102. (They remained the same in Greater San Jose, Calif.)

Oddly, the national median price went down when prices went up in two-thirds of the metropolitan areas. That's because the declining metro areas tend to have bigger populations and more home sales.

Salem, Ore., led the metro areas where median prices went up. In that state capital, the median price rose 24.7 percent in the third quarter of 2006 compared to the third quarter of 2005, to $228,000 from $182,800. Salem was followed by Elmira, N.Y., up 21.4 percent; Salt Lake City, up 19.2 percent; Greater Virginia Beach, Va., climbing 16.9 percent, and Gainesville, Fla., where prices gained 15.9 percent.


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