Orange County Register – A law exempting some homeowners from having to pay taxes on debt forgiven by the bank – the Mortgage Forgiveness Debt Relief Act and Debt Cancellation – is set to expire at the end of this year.
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Los Angeles Times – An audit shows the IRS has been sending notices to taxpayers that either inform them they owe no repayments on their credits when they actually do, or demand repayments from recipients who legally owe nothing.
San Francisco Chronicle – Congress has bestowed a wealth of tax breaks on homeowners, but in a way that resembles the Winchester Mystery House.
Whether you are a first-time or longtime homeowner, figuring out what you can and cannot deduct can be perplexing, especially because the laws change from year to year.
Here is a brief guide to homeowner taxes for 2010 returns. For a more complete picture, get your hands on IRS Publication 530 at sfg.ly/dW1G9H.
Deductible: For most homeowners, these expenses are deductible on Schedule A, itemized deductions.
– Mortgage interest. You can deduct the interest paid on up to $1 million in mortgage debt on your primary home and one additional residence. This includes home-equity debt that was used to substantially improve your home. Remember the $1 million limit ($500,000 if married filing separately) applies to your debt, not the interest on that debt.
– Home-equity debt. For regular income tax, you can also deduct interest on up to $100,000 in home-equity debt, no matter how it was used. But you can not deduct interest on more than $100,000 in home-equity debt that was not used to improve the home.
Suppose you have a $500,000 mortgage and take out a $250,000 home-equity loan. You use $100,000 of the home-equity loan to add a master suite and the other $150,000 to buy a car and pay off credit cards.
Interest on the $100,000 that went into the master suite is deductible because, when added to your $500,000 mortgage, it is still less than $1 million. Of the remaining $150,000, you can only deduct interest on $100,000.
If you are subject to alternative minimum tax, you can not deduct interest on home-equity debt that was not used to buy, build or improve a home.
For more on home mortgage interest, see IRS Publication 936.
– Points. When you buy or build your main home, you can deduct all of the points paid on your mortgage, as long they are labeled as points on the settlement and meet five other criteria found in Publications 936 or 530.
When you refinance a mortgage, you must deduct the points you paid gradually, over the life of the loan. When you pay off this loan, you can deduct any remaining points in that year. However, if you refinance with the same lender, you add points paid on the new loan to the remaining points on the old loan and deduct that amount over the life of the loan.
– Mortgage insurance. Through 2011, you can deduct mortgage insurance premiums, but only if the mortgage insurance contract was issued on or after Jan. 1, 2007.
– Property tax. Property taxes are generally deductible, unless you are subject to AMT, in which case you generally lose the deduction.
In 2008 and 2009 only, homeowners could deduct up to $500 in property taxes ($1,000 for joint filers) even if they did not itemize deductions, but this deduction is not available for 2010. Now they are only deductible on Schedule A, according to Mark Luscombe, principal federal tax analyst with CCH.
Not deductible: Most household expenses are not deductible, including homeowner association dues, homeowners insurance and utilities.
Except for points, most closing costs are not deductible, although some can be added to your cost basis.
Improvements to your home are not deductible, although you can usually add them to your cost basis.
Cost basis includes what you paid for the home, plus improvements, plus any untaxed profits rolled over from the sale of a home before May 7, 1997 (or in some cases Aug. 5, 1997). When you sell your home, you will subtract your cost basis from your sales proceeds to determine your capital gain. You will pay no tax on your first $250,000 in gains ($500,000 if married). Anything over that amount is subject to capital gains tax.
Note: When proposals like these are offered, they are essentially a tax increase, something we do not need anytime, particularly in a recession!) As part of its FY 2011 budget, the Obama administration has proposed limiting the value of the Mortgage Interest Deduction, which is being attacked as part of ongoing budget negotiations.
On Monday, NAR issued a Call for Action urging REALTORS® to send letters asking Congressional representatives to co-sponsor H.Res25, a bipartisan House resolution that affirms the value and importance of the Mortgage Interest Deduction.
NAR also has posted a video of NAR President Ron Phipps explaining the importance of MID and why REALTORS® need to join in the fight to preserve this valuable homeownership benefit.
NAR and C.A.R. continue to fight these efforts to limit the MID. Please support the MID by responding to NAR’s Call-for-Action.
Governor Schwarzenegger on Monday signed SB 401 (Wolk), a measure providing tax relief on mortgage debt forgiven in a short sale, foreclosure, or loan modification from 2009 through the end of 2012.
Previously, California homeowners were exempt from owing federal taxes on the forgiven mortgage debt, but still were required to pay California taxes on the so-called “phantom income.” SB 401 aligns the State’s tax code with that of the federal government and has become law in time for people to take advantage of it by the April 15 deadline for filing tax returns.
The tax relief applies only to people who lost the homes in which they were living as their principal residence. Investors are not affected by the new law and still owe taxes on “phantom income.”
For more information from the California Association of REALTORS®, click on the link below:
- San Francisco Association of Realtors
Governor Schwarzenegger has signed AB 183, the Home Buyers Tax Credit legislation, into law. The legislation will provide $200 million in tax credits, allocated as follows: $100 million for qualified first-time home buyers who purchase existing homes; and $100 million for purchasers of new, or previously unoccupied, homes.
Eligible taxpayers who close escrow on qualified principal residences between May 1, 2010 and December, 31, 2010, or who close escrow on a qualified principal residence on and after December 31, 2010 and before August 1, 2011, pursuant to an enforceable contract executed on or before December 31, 2010, will be able to take the allowed tax credit.
This credit is equal to the lesser of 5 percent of the purchase price or $10,000, taken in equal installments over three consecutive years. Under the bill, purchasers will be required to live in the home as their principal residence for at least two years or forfeit the credit (i.e. repay it to the state). Buyers also must be at least 18 years old and be unrelated to the seller. First-time buyers are defined as those who have not owned a home in the past three years.
The San Francisco Association of REALTORS® was contacted by the Governor’s office about a month ago and asked to send letters to specified legislators urging passage of the legislation and to issue a press release supporting the home buyer tax credits to the statewide media, which it did. A copy of one of the letters sent and the press release can be viewed by clicking on the links below.
C.A.R. beat three seperate legislative proposals that would have established costly point-of-sale mandates.
There are lots of questions as to who qualifies for the extended tax credit. The website
- Janis Stone – DRE# 00517072
Los Angeles Times – If ever there was a great time buy a first home, it’s now. Interest rates and housing prices are low, and the federal government is giving money to buyers in the form of an $8,000 tax credit.
We are issuing an urgent plea for everyone to contact members of Congress immediately to urge them to extend the First Time Home Buyer Tax Credit to help keep the economy recovering. Some 1.2 million households have used the $8,000 tax credit since it was enacted earlier this year as part of the economic stimulus package. Without congressional action, the credit will expire on December 1. Since it takes 45-60 days to get to closing, if not longer, households have little time remaining to take advantage of the credit. That’s not good for markets. “Uncertainty about the future of the credit will dampen consumer demand,” says Charles McMillan, president of NAR. “The only way we can assure that the progress we’ve made can continue is to extend the credit and to do that now.”
You will need to contact your representative depending on your location. The best resource we have found for finding contact information on members of congress is here.
- Janis Stone