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Tax Breaks For Homeowners

REALTY TAX: Homeowners often overlook valuable tax breaks Miami Herald
ROBERT J. BRUSS
March 14, 2004

Last in a series

If you own a house, condo or cooperative apartment, you might be among the millions of homeowners who forget to claim all the tax deductions to which you are entitled. Uncle Sam encourages home ownership by awarding special tax breaks. That's why 68 percent of U.S. households involve home owners.

It's up to each homeowner to use these tax breaks to maximum advantage. Using just one or two forgotten tax breaks can save hundreds, sometimes thousands, of dollars.

** If you bought a home, deduct your principal residence mortgage acquisition loan fee. If you purchased your principal residence in 2003, and if you paid a loan fee (usually called "points") to obtain a home mortgage, that fee qualifies as an itemized interest deduction in the year of home purchase.

Each point equals one percent of the amount borrowed. For example, if you obtained a $100,000 mortgage, you might have paid a two-point loan fee to lower your mortgage's interest rate, or $2,000. Be sure to double-check the IRS Form 1098 sent in January by your lender. If it did not include the loan fee points you paid in 2003, itemize them anyway on Schedule A of your income-tax return. Your proof of payment will usually be on the loan closing papers received at the time of home purchase.

** Deduct home mortgage refinance fees over the life of the mortgage. If you refinanced your home mortgage and paid loan fee points, those points are not deductible in the year of payment. Instead, you can deduct them over the life of the mortgage. Rather than paying loan fee points when refinancing, most home owners are usually better off obtaining a no-fee mortgage and paying a slightly higher tax-deductible mortgage interest rate.

** If you changed job location and residence location in 2003, your moving costs may be tax deductible. Whether you rent or own your home, if you changed both your job location and your residence in 2003, your moving costs might be tax deductible. If you made a major cross-country move, the result can be savings of hundreds or even thousands of income-tax dollars.

** Deduct any home mortgage prepayment penalty paid. Whether you sold your home, or refinanced its mortgage, if you paid a mortgage prepayment penalty, you can claim it as an itemized Schedule A deduction. Be sure the IRS Form 1098 received from your lender includes the penalty paid.

** Deduct undeducted loan fees from a prior home loan refinance. If you refinanced your home loan in 2003, perhaps for the second or third time to take advantage of record-low interest rates, any undeducted loan fees from your prior home loan refinance can be deducted in full in the year of the refinance.

To illustrate, suppose you had $900 of undeducted loan fee points refinancing in 2002. Because you refinanced in 2003 to pay off that old mortgage, the full $900 in undeducted loan fees became deductible on your 2003 income tax return.

** Deduct pro-rated mortgage interest share in the year of home sale or purchase. If you bought a home in 2003 and took over its existing mortgage payments from the prior owner, in the month of purchase the mortgage interest was pro-rated between the buyer and seller. This pro-ration is usually calculated on the closing settlement statement. Even if the other party actually paid the mortgage payment for the month, you are entitled to deduct your share of the pro-rated mortgage interest as an itemized deduction.

** Deduct your share of pro-rated property taxes if you bought or sold your home. You are entitled to deduct your share of the pro-rated property taxes, even if the other party actually paid the tax bill. Your share of the pro-rated tax bill should be on your closing settlement statement.

** Deduct prepaid mortgage interest and property taxes. Prepaying mortgage interest and property taxes can be a great tax savings, but you must have made the prepayments by Dec. 31, 2003.

Double-check your mortgage lender's IRS Form 1098 to be sure it included your prepaid mortgage interest for the January 2004 payment, which you sent to the lender in December 2003. If you prepaid in late 2003 your property taxes due in 2004, you should have either a canceled check or other evidence you prepaid the property taxes in 2003.

** Deduct and double-check property taxes paid from your escrow impound account. If your mortgage includes a monthly escrow or impound account payment for one-twelfth of your annual property tax bill, double-check to be certain your mortgage lender remitted your property taxes to the tax collector on time in 2003. Unfortunately, many mortgage lenders forget to pay tax bills on time. Just because you paid your escrow impound payment on time to the lender does not make the full amount tax deductible. Only the amount actually remitted to the property tax collector in 2003 qualifies as an itemized deduction for your primary or secondary home.

** Deduct ground rent payments if your home is on leased land. To qualify, your situation must meet the tax law's exact requirements. For example, if you rent a "pad" or lot in a mobile home park, your monthly rent paid to the park owner usually will not qualify for this deduction.

Internal Revenue Code 163(c) permits homeowners living on a leased parcel to deduct their ground rent payments if the ground lease is for at least 15 years, including renewal periods, the lease is freely assignable to the buyer of your home, the landowner's interest is primarily a security interest (like a mortgage), and you have a current or future option to buy the land. If you do not have an option to buy the land, such as in a mobile home park, your land lease or ground rent payments do not qualify as tax-deductible itemized interest.

For further information contact Anthony Pipitone at 312-492-3239.