Tax Tips

Tax Write-Offs to Remember from the Home Loan Process

Can you believe it’s already 2011? If you bought a home in any of the great communities in Northwest Indiana last year, make sure to add these tax write-offs to your New Year’s Resolution.

Write-offs are the government’s way of rewarding taxpayers when they’ve done something the government likes. And to judge by the write-offs, the government likes it when people borrow money to buy a house. There are write-offs aplenty, many associated with the home loan process of which homebuyers often forget.

Make sure you take advantage of every break the IRS will give. Here are a few write-offs many new homeowners tend to forget:

• Points – According to the IRS, origination fees charged as points must be paid for the use of money, (for example, to obtain a lower interest rate) in order to be tax deductible. Origination fees that constitute a “service fee” are not tax deductible. Question to be asked, “Does the fee apply to the use of money, or is it a service charge?“
• Pre-Payment Penalties – Unforeseen circumstances often cause borrowers to payoff their mortgages sooner than expected. Fortunately, pre-payment penalties are tax deductible, which helps ease the pain.
• Pro-Rated Real Estate Taxes – Even if the seller sent the tax collector the check, chances are that you the homebuyer paid a pro-rated portion of the real estate taxes for the year at closing. Be sure you know to deduct your fair share.
• Pro-Rated Mortgage Interest – Depending on when in the month you closed on the home purchase, buyers pay either a hefty or a tiny amount of pro-rated mortgage interest for that month. Big or small, you can write that off. The Final Closing/Settlement Statement will show just how much you’re due.
• Home Construction Loan Interest – As long as the home construction period doesn’t last more than two years before you make the new place your “principal residence“, you can write off the interest for that home construction loan.

It pays to pay attention – all these write-offs can add up to some serious savings when tax time comes around.

Do you need professional tax help with these tax write-offs to remember from the home loan process in the New Year? Contact me today for a referral to a great local tax advisor to maximize your tax savings.

Home Buyer Tax Credit Still Available for a Special Group

Did you know that the home buyer tax credit that was so heralded during spring 2010 is still available. There are special rules that apply to the homebuyer tax credit if you are a member of the uniformed services, the Foreign Service of the United States, or an employee of the intelligence community.

Here is how it works:

• A “first time home buyer” is defined as someone who has not owned a primary home in the last three years. If you are a “first-time home buyer”, your tax credit will amount to 10% of the purchase price of your new home not to exceed $8,000.
• A “long-time resident” is defined as someone who has lived in the same primary home for 5 out of the past 8 years. If you are a “long-time resident”, your tax credit will amount to 10% of the purchase price of your new home not to exceed $6,500.
• The tax credit does not need to be paid back if you continue living in the home as your primary residence for three years without selling it. If you sell the home in connection with government orders for official service, the credit does not need to be repaid even if you sell your home within the three year timeframe.
• The home must be purchased for less than $800,000 before May 1, 2010. If you sign a binding contract to purchase a home before May 1st, you would need to close on the transaction before July 1, 2010. If you have served for at least 90 days of the year outside of the United States, you have until May 1, 2011 to purchase your home and receive the tax credit. In that case, if you sign a binding contract to purchase a home before May 1, 2011, you would need to close on the transaction before July 1, 2011.
• Single taxpayers with incomes up to $125,000 and married couples with incomes up to $225,000 qualify for the full tax credit.
• You cannot purchase the home from a related party like a spouse, direct ancestor, or direct lineal descendent (child or grandchild); however, you can still qualify for the credit if you purchase a property from siblings, nephews, nieces, and others.
• If you are married, both spouses must qualify for the credit.
• If more than one unmarried individual is buying the property, the credit can be split up among all the individuals who qualify. However, the total credit taken cannot exceed $8,000 (or $6,500 for “long-time residents”). Alternatively, if only one of the unmarried buyers qualifies for the credit based on their income or past home ownership status, the individual who qualifies for the credit can claim the full credit.
• The credit applies even if you have co-signers on your mortgage loan.
• The credit applies to 1-4 unit homes as long as you live in one of the units as your primary residence – you could live in one unit and rent out the others.

How does the tax credit work?

A tax credit is kind of like a gift certificate that you can use to pay your taxes – it reduces your income tax bill on a dollar for dollar basis. Imagine paying your bill at Restaurant IRS, and then later getting an Restaurant IRS gift certificate. Normally, you would need to go back to Restaurant IRS and buy more food in order to use your new gift certificate. But what if Restaurant IRS allowed you to just turn in your gift certificate for cash? That’s how the home buyer tax credit works!

All you need to do is file a form with the IRS after you buy your new home and they will send you a refund check for $8,000 (or $6,500) – just like the example of Restaurant IRS that allows you to exchange your gift certificate for cash! Remember though, you’ll receive the $8,000 (or $6,500) from the IRS AFTER you purchase your new home, so you cannot use the funds to help with your down payment.

For more information about the home buyer tax credit as it applies to this special group, just contact us. We would be happy to assist you with your mortgage in the purchase of your new home!

To ensure compliance with requirements imposed by the Internal Revenue Service, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, by any person for the purpose of (i) avoiding tax-related penalties or (ii) promoting, marketing or recommending to another person any transaction or matter addressed in this communication. I recommend that you consult with properly licensed legal, tax and investment advisors for specific advice pertaining to your individual situation.

Home Buyer Tax Credit Has NOT Been Extended Yet

As its June 30, 2010 closing deadline approaches, the federal home buyer tax credit is back in the news.

Unfortunately, the headlines are misleading.

Contrary to what you may have read (or heard), the federal home buyer tax credit has not been extended past June 30, 2010. At least not yet. And here’s why there’s confusion.

Look at these headlines from earlier this week:

• Senate Extends Date On Home-Buying Tax Credit (Philadelphia Inquirer)
• U.S. Senate Approves Extension Of Home Buyer Tax Credit (NASDAQ)
• Senate Approves Home Tax Credit Extension (Reuters)

Now, nothing above is factually incorrect, but each neglects a key piece of the country’s law-making process — it takes more than the Senate to pass a law. For a bill to become a law, it must pass the Senate and the House of Representatives and then it must be ratified by the President.

To date, we’ve only cleared just one of those 3 steps.

This means that the federal home buyer tax credit has not been formally extended. As of now, it’s still in discussion.  Ultimately, though, if the extension does pass, it’s expected to extend the closing date deadline for home buyers in Highland Indiana beyond the original June 30, 2010 date into September 2010.

Homeowners must still have been in contract as of April 30, 2010 to claim up to $8,000 in federal tax credits.