QUESTION:

"I own a house but am interested in upgrading to a new home. I've only been in the house for 1 year. I heard if it's less than 2 years, you have to pay and there is no way around it. But then my broker told me if you are upgrading to a bigger house, then you do not have to pay capital gains taxes. Is this true?"

ANSWER FROM A CPA:

"Your broker is confused because of the 1997 change in the tax law. For many years, the tax was postponed for any gain on the sale of a principal residence provided it was replaced with a more expensive residence within a certain period of time after the sale. That law was repealed back in 1997 to the law in Aaron's last newsletter ("Save $100,000's When Selling Your Home") on the topic."

"Under the present law, there are exclusions available provided you used the home as a principal residence during at least two of the five years before selling it. The exclusions are $250,000 for most individuals and $500,000 for married persons, who meet certain requirements, filing a joint return."

QUESTION:

"What can I deduct from the settlement statement when I buy a home?"

ANSWER FROM A CPA:

"The only settlement or closing costs you can deduct are home mortgage interest, points that represent interest, like discount points, and certain real estate taxes."

"You may take these deductions in the same year you buy your home if you itemize your deductions. Real estate taxes are usually divided so that you and the seller each pay taxes for the part of the property tax year that each owned the home."

"There are some settlement or closing costs that you cannot deduct. These include the fees and costs for getting a mortgage loan. For example, lender fees like the loan origination, processing fees, underwriting fees and such are not deductible. The prepaid interest is."

"Fees that are not associated with the acquisition of a loan, like if you paid cash for the home, may only have effect on the basis of the home. An example would be a transfer tax that would be charged regardless of whether a loan was involved."

QUESTION:

"Are the fees to my HOA deductible?"

ANSWER FROM A CPA:

"Homeowners association fees are considered personal living expenses and are not tax-deductible. If, however, an association has a special assessment to make one or more capital improvements, you may be able to add the expense to your cost basis. Cost basis is a term for the money an owner spends for permanent improvements throughout their time in the home and is used to reduce eventual capital gains taxes when the property is sold."

"For example, if the association puts a new roof on a building, the expense could be considered part of a condo owner's cost basis only if they lived directly underneath it. Overall improvements to common areas, such as the installation of a swimming pool, need to be considered on a case-by-case basis but most can be included in the cost basis of any owner who can show their home directly benefits from the work."

QUESTION:

"If I sell my home and lose money, can I deduct the loss I suffered when I sold my home?"

ANSWER FROM A CPA:

"The IRS allows no deductions for losses on the sale of your own home."

QUESTION:

"I have a mortgage for my primary residence. I recently bought for land that I will soon build a home on. I have a mortgage on that land too. Can the interest on my land mortgage be deducted?"

ANSWER FROM A CPA:

"Yes, but only if you are occupying the home on the raw land within 24 months. If not, the land is considered an investment and would not qualify as deductible mortgage interest. However, it would constitute investment interest if you itemize your deductions."

QUESTION:

"I paid my son's mortgage and real estate taxes last year, however the house is in his name. Can I deduct the mortgage interest and property tax on my tax return?"

ANSWER FROM A CPA:

"No, you cannot deduct the property taxes unless you are the legal owner of the property. You cannot deduct the mortgage interest unless you are legally liable for the loan. Your son cannot deduct the mortgage interest either because she did not make the payments. You need a better solution. If you are going to continue this practice, consider talking to your accountant about gifts and other ways to achieve the same results with some real benefits."

QUESTION:

"My son and I own a house together. His name is on the mortgage, but we are both on the deed. Can we each claim half of the yearly interest and property tax on our income tax returns?"

ANSWER FROM A CPA:

"If your son is on the mortgage, and you are not, only he is legally liable for the loan. This means only he can get the interest deduction. However, since both of you are on the deed and thus are both legal owners of the property, both of you may deduct one-half of the real estate taxes."

QUESTION:

"Is interest on my home equity line of credit deductible?"

ANSWER FROM A CPA:

"Yes, in most cases, you may deduct Home Equity Debt Interest if you are legally liable to pay the interest, pay the interest in the tax year, and have secured the debt with your home."

QUESTION:

"I just bought a lot where I am building my own home. Is the interest paid on the loan for a lot deductible as mortgage interest?"

ANSWER FROM A CPA:

"You can start deducting mortgage interest once construction begins. You can treat a home under construction as a qualified home for a period of up to 24 months, but only if it becomes your qualified home at the time it is ready for occupancy. A qualified residence is your principal residence or one other residence selected by you that you use as a residence. The 24-month period can start any time on or after the day construction begins."

QUESTION:

"I took out a construction loan to build my new home is the interest considered deductible mortgage interest?"

ANSWER FROM A CPA:

"You can treat a home under construction as a home qualifying for the home interest deduction for a period of up to 24 months, but only if it becomes your qualified home at the time it is ready for occupancy."

QUESTION:

"I did a cash-out home equity loan to do some debt consolidation and pay off personal debts. Is this interest deductible?"

ANSWER FROM A CPA:

"A loan taken out for reasons other than to buy, build, or substantially improve your home, such as to pay off personal debts may qualify as home equity debt and may be deductible."

QUESTION:

"May I deduct my home improvements and repairs to my home?"

ANSWER FROM A CPA:

"Home improvements add to the value of your home, prolong its useful life, or adapt it to new uses. Home improvements costs are not deductible. However, you add the cost of improvements to the basis of your property."

Repairs maintain your home in good condition. They are not deductible nor do they add to your home's value or prolong its life. You do not add their cost to the basis of your property.

QUESTION:

"I bought a second home. Is the mortgage interest and property tax on a second home deductible?"

ANSWER FROM A CPA:

The mortgage interest and real estate taxes on a second home which you use as a residence for some portion of the year, is generally deductible.

CAUTIONARY DISCLAIMER:

Please be advised that this newsletter is for informational purposes only. I am not a tax expert and I cannot guarantee the absolute accuracy of these answers. It is of utmost importance that you speak with a tax professional before making any decision regarding any tax deductions you make. All of the answers above, even the most accurate, can be changed at anytime by the Internal Revenue Service and this material will, at some point, be considered out of date.