ASK RAY ABOUT REAL ESTATE | 10 tax deductions for 2010
Wednesday, April 06, 2011 4:43 AM
I live in a condo. I know that my monthly homeowners-association (HOA) dues are not tax-deductible. What about special assessments for major repairs? My neighbor says that special assessments are tax-deductible.
Your neighbor is wrong. It’s time to revisit this question again. Although I have covered this information in a previous column, it is one of the most frequently asked questions by condo owners.
You may not deduct your regular HOA dues because they are considered personal living expenses.
If, however, your homeowners association levies a special assessment for capital improvements, such as a new roof, condo owners may be able to add the expense to their cost basis. That is, you may be able to add your portion of the roof expense to your original purchase price. This will reduce your capital gains taxes when the property is sold.
This only applies if you live in the condo. Special assessments should be evaluated on a case-by-case basis by a knowledgeable tax professional, but most can be included in the cost basis of any owner who can demonstrate that his or her home directly benefited from the work.
Among the greatest benefits of homeownership are the tax deductions. To take full advantage of deductions, you’ll need to itemize your taxes.
•Mortgage interest — Homeowners may deduct 100 percent of the mortgage interest from their income-tax returns. If you’re in a 28-percent tax bracket, Uncle Sam effectively subsidizes one-third of your borrowing costs; this makes homeownership one of the smartest investments you can make.
•Property taxes — You can also deduct the local property taxes you pay each year. (Homeowners who take the standard deduction instead of itemizing can deduct a portion of their property taxes.)
•Mortgage points — If you recently purchased or refinanced a home, you may have paid “points” to the lender to buy down your interest rate. You can deduct the points even if the seller paid for them as part of your deal.
•Private mortgage insurance (PMI) — If you paid less than 20 percent down, your loan probably includes a premium for private mortgage insurance, which protects the lender if he or she defaults on the loan. Homeowners can deduct PMI premiums. There are limits to this deduction, so contact your certified public accountant (CPA).
•First-time buyer federal tax credit — If you purchased a home before April 30, 2010, you may be eligible for either an $8,000 tax credit for first-time buyers or $6,500 tax credit for move-up buyers.
Again, there are limits to this deduction: $125,000 income for a single taxpayer and $225,000 for married couples.
•Home-office deduction — If you work from home, you may qualify for a home-office deduction. According to the Small Business Administration, the average home-office deduction is almost $3,700.
Home-office deductions should be discussed in detail with a tax expert. Not all home offices will qualify for this deduction, and home offices cannot be exempted from capital gains tax when you sell your home.
•Tax relief for loan modifications, short sales and foreclosures — 2011 is expected to be the peak year for foreclosures. In the Greater Seattle area, foreclosures are on the rise. If you are a homeowner who finds yourself in a short sale, loan modification or foreclosure, you should be aware that any mortgage balance that is forgiven is usually taxed as income.
Under the Mortgage Debt Forgiveness Relief Act of 2007, the IRS is not charging income taxes on cancelled mortgage debt that occurs on primary residences through 2012. Resolving mortgage defaults is taking many months — in some cases, nearly two years — to resolve. Do what you can to expedite resolution of your distressed home loan before the 2012 deadline.
•Closing costs — If you bought or re-financed your home in 2010, you may deduct the loan-origination fee paid to your lender. You may also deduct any points (see above).
Take a look at the HUD-1 Settlement Statement (a legal-sized paper) that you received at escrow.
•Energy tax credits — Some improvements to your home qualify for additional energy tax credits. These include solar upgrades, new windows, doors and insulation.
There are state and federal energy tax credits. Check with your CPA.
•Tax-free profit on sale — The biggest tax benefit occurs when you sell your home. If you are single and have lived in your primary residence for at least two years, then up to $250,000 of profit is tax-free at the time of sale.
If you’re married and file taxes jointly, then up to $500,000 of the profit is tax-free.
My best tax tip: Consult with a CPA or other tax professional. In my experience, you’ll save more on taxes when you use a tax professional to prepare your tax return.
RAY AKERS has been a licensed Realtor for more than 20 years. Send your questions to firstname.lastname@example.org or call (206) 722-4444.