Tax breaks sweeten homeownership

Uncle Sam encourages homeownership by awarding tax breaks to those who own a house or condominium. But it’s up to each homeowner to use these tax incentives to maximum advantage. Not every deduction applies to each owner.

But it’s important to know about the available deductions and claim the appropriate ones because they can provide considerable tax savings. Here are the 10 most frequently overlooked deductions:

* If you paid a fee (usually called “points”) to obtain a mortgage to buy your principal residence, the fee qualifies as an itemized interest deduction in the year of the acquisition. Each point equals 1% of the amount borrowed. For example, a 2-point, or $2,000, fee on a $100,000 home acquisition mortgage qualifies as an itemized interest deduction.

If the IRS Form 1098 sent in January by your mortgage lender did not include the points you paid last year, be sure to 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 purchase.

* If you paid points to obtain a refinancing loan, those points are deductible over the life of the mortgage rather than in the year of payment.

For example, suppose you paid $1,000 in points to refinance a new 30-year mortgage; for 30 years you will have an annual itemized $33.33 deduction.

* If you changed both your job and your residence last year, your moving costs may be deductible whether you rent or own your home. To qualify, the distance from your old home to your new job must be at least 50 miles farther than the distance from your old home to your old job. The distance to your new job from your new residence is irrelevant.

For example, suppose your old home was five miles from your old job. That means your new job location must be at least 55 miles (five plus 50) from your old home for you to qualify to deduct your moving expenses.

If you passed the moving expense distance test, the second qualification requires you to be employed at least 39 weeks during the next 52 weeks in the vicinity of your new job location.

But you need not work for the same employer. Either spouse can qualify. However, if you are self-employed, you must work at least 78 weeks during the next 104 weeks in the vicinity of your new job site.

* If you paid a prepayment penalty when you sold your home or refinanced its mortgage, don’t forget to claim the penalty as an itemized Schedule A deduction. Be sure to double-check the IRS Form 1098 received from your lender because it might not include the prepayment penalty.

* If you refinanced your home loan for the second or a subsequent time, any undeducted loan fees from your prior home loan refinance can be deducted in full in the year of the refinance.

For example, suppose you had $900 of undeducted loan fee points from refinancing during a previous year. If you refinanced again to pay off that old mortgage, the full $900 in undeducted loan fees is deductible in the year of the second refinance.

* If you bought a home and took over its existing mortgage payments from the prior owner (called assuming or buying “subject to” the mortgage), you are entitled to deduct your share of the pro-rated mortgage interest as an itemized deduction on your income tax returns. This is true even if the other party actually paid the mortgage payment for the month.

* If you bought or sold a home, you are entitled to deduct your share of the prorated property taxes, even if the other party actually paid the local tax collector’s bill.

* If you paid mortgage interest and property taxes by Dec. 31 that were due in the next year, you can deduct the payments for the year in which they were paid. Not all property tax collectors allow early payments, but if yours does, this can be a great tax saver.

* 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 sent your property taxes to the tax collector on time in 2003. Unfortunately, many mortgage lenders forget to pay these important tax bills on time. Simply making your escrow payment on time to the lender does not make the full amount tax deductible. Only the amount actually remitted to the property tax collector qualifies as an itemized deduction for your primary or secondary home.

* If your home is on leased land, you can deduct ground rent payments under four conditions: (a) the ground lease is for at least 15 years, including renewal periods, (b) the lease is freely assignable to the buyer of your home, (c) the landowner’s interest is primarily a security interest (like a mortgage) and (d) you have a current or future option to buy the land beneath your residence. If you do not have an option to buy the land, your land lease or ground rent payments do not qualify as tax-deductible itemized interest.

For more details on homeowner tax benefits, please consult a tax advisor.