| Q: |
What
is the Mortgage Credit Certificate program?
|
| A:
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The Mortgage Credit Certificate program
allows first-time home buyers to take advantage
of a special federal income tax credit.
This program allows buyers credit in qualifying
for the tax advantage they'll receive after
they purchase the home.
The
amount of the credit is tied to a local
formula that every city with a MCC program
must follow. A MCC credit, which can total
$2,000 or more, reduces the borrower's
federal tax liability by an amount tied
to how much one pays in annual mortgage
interest. Both the borrower's income and
the purchase price of the home must fall
within established guidelines.
To
see if your community has a MCC program,
call your local housing or redevelopment
agency. You also may inquire with your
real estate broker or the local association
of Realtors. |
|
| Q:
|
Are
taxes on second homes deductible? |
| A:
|
Mortgage interest and property taxes are
deductible on a second home if you itemize.
Check with your accountant or tax adviser
for specifics. |
|
| Q:
|
What
home-buying costs are deductible? |
| A:
|
Any points you or the seller pay to purchase
your home loan are deductible for that year.
Property taxes and interest are deductible
every year.
But
while other home-buying costs (closing
costs in particular) are not immediately
tax-deductible, they can be figured into
the adjusted cost basis of your home when
you go to sell (any significant home improvements
also can be calculated into your basis).
These fees would include title insurance,
loan-application fee, credit report, appraisal
fee, service fee, settlement or closing
fees, bank attorney's fee, attorney's
fee, document preparation fee and recording
fees. Points paid when you refinance an
existing mortgage must be deducted ratably
over the life of the new loan.
|
|
| Q:
|
How
do you choose between buying and renting?
|
| A:
|
Home ownership offers tax benefits as well
as the freedom to make decisions about your
home. An advantage of renting is not worrying
about maintenance and other financial obligations
associated with owning property.
There
also are a number of economic considerations.
Unlike renters, home owners who secure
a fixed-rate loan can lock in their monthly
housing costs and make prudent investment
plans knowing these expenses will not
increase substantially.
Home
ownership is a highly leveraged investment
that can yield substantial profit on a
nominal front-end investment. However,
such returns depend on home-price appreciation.
|
|
| Q:
|
Explain
the home mortgage deduction. |
| A:
|
The mortgage interest deduction entitles
you to completely deduct the interest on
your home loan for the year in which you
paid it. Mortgage interest is not a dollar-for-dollar
tax cut; it reduces taxable income. You
must itemize deductions in order to do this,
which means your total deductions must exceed
the IRS's standard deduction.
Another
point to remember is that the amount of
interest on your loan goes down each year
you pay on your mortgage (all standard
home-loan formulas pay off interest first
before significantly paying into principal).
That's why paying extra on your principal
every year can help you pay off your loan
early. |
|
| Q:
|
Should
I buy a vacation home? |
| A:
|
Today a vacation home can be purchased for
investment purposes as well as enjoyment.
And yes, there are tax benefits.
Some people
buy a vacation home with the idea of turning
it into a permanent retirement home down
the road, which puts them ahead on their
payments. Another benefit is that the
interest and property taxes are tax deductible,
which helps to offset the cost of paying
for a second home. A vacation home also
can be depreciated if you live in it less
than 14 days a year, or 10 percent of
the rented days - whichever is greater.
|
|
| Q:
|
Are
there tax credits for first-time home buyers?
|
| A:
|
Many city and county governments offer Mortgage
Credit Certificate programs, which allow
first-time home buyers to take advantage
of a special federal income tax write-off,
which makes qualifying for a mortgage loan
easier.
Requirements
vary from program to program. People wanting
to apply should contact their local housing
or community development office.
Here
is a list of four general requirements
to keep in mind:
* Some credit may be claimed only on your
owner-occupied principal residence.
*There are maximum income limits, which
vary by locality and family size.
* You must be a first-time home buyer,
which means you must not have had any
kind of ownership interest in a principal
residence during the past three years.
This restriction may be waived, however,
if you are buying property within certain
target areas.
* Allocations must be available. A local
MCC program may have to decline new applications
when it runs out of funds. |
|
| Q:
|
Are
seller-paid points deductible? |
| A:
|
As of Jan. 1, 1991, homeowners have been
able to deduct points paid by the seller.
This deduction previously was reserved only
for points actually paid by the buyer. |
|
| Q:
|
How
do I save on taxes? |
| A:
|
Here are some ways to save money on taxes:
*
Mortgage interest on loans up to $1 million
is completely deductible for the year
in which you pay it to buy, build or improve
your principal residence plus a second
home.
* Points, or loan origination fees, also
are deductible no matter who pays them,
the buyer or the seller.
* Most homeowners, except the wealthy
and those living in high-priced markets,
no longer need to worry about capital
gains taxes. The exemption has been raised
to $500,000 for married couples and $250,000
for single owners. It can be taken every
two years. Homeowners should always keep
all receipts of permanent home improvements
and of mortgage closing costs. If you
do have to pay capital gains taxes, these
costs can be added to your adjusted cost
basis. Consult your tax adviser for more
information.
Resources:
* "Tax Information for First-Time
Homeowners," IRS Publication 530,
and "Selling Your Home," IRS
Publication 523. Call (800) TAX-FORM to
order or download from www.irs.gov. |
|
| Q:
|
When
is the best time to buy? |
| A:
|
Here are some frequently cited reasons for
buying a house:
*
You need a tax break. The mortgage interest
deduction can make home ownership very
appealing.
* You are not counting on price appreciation
in the short term.
* You can afford the monthly payments.
* You plan to stay in the house long enough
for the appreciation to cover your transaction
costs. The costs of buying and selling
a home include real estate commissions,
lender fees and closing costs that can
amount to more than 10 percent of the
sales price.
* You prefer to be an owner rather than
a renter.
* You can handle the maintenance expenses
and headaches.
* You are not greatly concerned by dips
in home values. |
|
| Q:
|
What
are the rules for mortgage credit certificates?
|
| A:
|
To qualify for a mortgage credit certificate,
both your income and the purchase price
of the home must fall within established
city guidelines. These guidelines vary by
city but generally only permit people who
earn an average income or slightly higher
than average income.
A
limited number of cities have authorized
the MCC program. Contact your municipal
housing department for more information.
|
|
| Q:
|
Are
points deductible? |
| A:
|
If you are a buyer, and you or the seller
pays points, they are deductible for the
year in which they are paid only. You also
can deduct any points you pay when you refinance
your home, but you must do so ratably over
the life of the loan. Consult your tax or
financial advisor. |
|
| Q:
|
Where
do I get information on IRS publications?
|
| A:
|
The Internal Revenue Service publishes a
number of real estate publications. They
are listed by number:
* 521 "Moving Expenses"
* 523 "Selling Your Home"
* 527 "Residential Rental Property"
* 534 "Depreciation"
* 541 "Tax Information on Partnerships"
* 551 "Basis of Assets"
* 555 "Federal Tax Information on Community
Property"
* 561 "Determining the Value of Donated
Property"
* 590 "Individual Retirement Arrangements"
* 908 "Bankruptcy and Other Debt Cancellation"
* 936 "Home Mortgage Interest Deduction"
These publications are available for free
online at www.irs.gov or by calling (800)
TAX-FORM. |
|
| Q:
|
How
do I reach the IRS? |
| A:
|
To reach the Internal Revenue Service, call
(800) TAX-1040 or go online at www.irs.gov. |
|
| Q:
|
How
are fees and assessments figured in a homeowners
association? |
| A:
|
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,
condo owners may be able to add the expense
to their 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.
To
find out more about how the IRS views
condo association fees, look to IRS Publication
17, "Your Federal Income Tax,"
which includes a section on condos. Order
a free copy by calling (800) TAX-FORM.
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