How would you like to have Uncle Sam help pay for your lawyer or accountant at your next real estate settlement? If your tax advisor is on the ball, he or she will identify several deductible charges many people miss when they prepare their tax return for a year in which real estate is purchased – potentially saving you hundreds of dollars at tax time.
Most people know that real estate taxes and home mortgage interest are deductible, but many people forget to take the deduction for the pro-rated portion of real estate taxes and interest paid to the date of settlement. Let’s look at an example.
Suppose you settle on the purchase of a new home on April 7, 1996. Chances are good that the seller has already paid school taxes through June 30, 1996 and county and township taxes through December 31, 1996. As a result, you, as the buyer, will reimburse the seller for school taxes from the date of settlement until June 30, 1996; you will also reimburse the seller for county and township taxes between the date of settlement and December 31, 1996. These reimbursements, reflected as credits to the seller on the settlement sheet, are deductible real estate tax payments. Since they are being made at settlement and not as part of your mortgage payment, you will more than likely receive no year-end reminder from your lender that you paid them.
The issue is similar with home mortgage interest. At settlement, you will be paying interest on your new mortgage from April 7 through April 30. Because your loan is not yet set up on the lender’s system, there is a good chance that you will not receive a year-end report (Form 1098) of this interest payment from your lender. The payment is deductible mortgage interest.
Another frequently missed deduction relates to points paid in connection with refinancing an existing mortgage. Points paid in connection with an acquisition mortgage are deductible in full in the year paid. However, points paid in connection with refinancing an existing mortgage must be amortized over the life of the loan, usually thirty years. One-thirtieth of the total points can be deducted in each subsequent year. But what if you refinance a loan that was itself a refinance? The same rule applies (the points paid on the new loan must be amortized); but when you pay off the existing refinanced loan, any remaining undeducted points attributable to that loan are accelerated and can be deducted currently. Thus, if you are five years into a thirty year refinance loan and then refinance that loan, you can deduct the remaining 25/30 of the points in the year that loan is paid off – often a sizeable deduction.
The potential tax savings arising out of these simple deductions can be significant, and clients are pleased to learn that as much as one-third of every dollar of deduction translates into money in the bank.
Most people know that real estate taxes and home mortgage interest are deductible, but many people forget to take the deduction for the pro-rated portion of real estate taxes and interest paid to the date of settlement. Let’s look at an example.
Suppose you settle on the purchase of a new home on April 7, 1996. Chances are good that the seller has already paid school taxes through June 30, 1996 and county and township taxes through December 31, 1996. As a result, you, as the buyer, will reimburse the seller for school taxes from the date of settlement until June 30, 1996; you will also reimburse the seller for county and township taxes between the date of settlement and December 31, 1996. These reimbursements, reflected as credits to the seller on the settlement sheet, are deductible real estate tax payments. Since they are being made at settlement and not as part of your mortgage payment, you will more than likely receive no year-end reminder from your lender that you paid them.
The issue is similar with home mortgage interest. At settlement, you will be paying interest on your new mortgage from April 7 through April 30. Because your loan is not yet set up on the lender’s system, there is a good chance that you will not receive a year-end report (Form 1098) of this interest payment from your lender. The payment is deductible mortgage interest.
Another frequently missed deduction relates to points paid in connection with refinancing an existing mortgage. Points paid in connection with an acquisition mortgage are deductible in full in the year paid. However, points paid in connection with refinancing an existing mortgage must be amortized over the life of the loan, usually thirty years. One-thirtieth of the total points can be deducted in each subsequent year. But what if you refinance a loan that was itself a refinance? The same rule applies (the points paid on the new loan must be amortized); but when you pay off the existing refinanced loan, any remaining undeducted points attributable to that loan are accelerated and can be deducted currently. Thus, if you are five years into a thirty year refinance loan and then refinance that loan, you can deduct the remaining 25/30 of the points in the year that loan is paid off – often a sizeable deduction.
The potential tax savings arising out of these simple deductions can be significant, and clients are pleased to learn that as much as one-third of every dollar of deduction translates into money in the bank.
– Kevin Palmer