Real Estate Tax Considerations
When buying a home, there are a lot of things to think about. Many are financial, as there are both costs and benefits to owning real estate. Below are some real estate tax considerations to help inform your decision.
Are seller-paid points deductible?
As of Jan. 1, 1991, homeowners have been able to deduct points paid by the seller. Before, this deduction was reserved only for points paid by the real estate buyer.
Can I deduct the loss I suffered when I sold my home?
Currently, the IRS does not allow deductions for losses on the sale of your own home. Unfortunately a loss on the sale of your real estate can not be used to your advantage for tax purposes.
What are the rules on capital gains when inheriting a house?
When children inherit a home, the IRS determines their basis in the property on the date of the owner’s death. The cost basis is not the amount the owner originally paid for the house, but the property’s fair-market value on the date of the parent’s death.
Cost basis is a tax term for the value assigned to a real estate property at the time it is acquired, for the purpose of determining gain or loss when it is sold. For example, one of the three siblings sold his or her share of a property to be divided equally, he or she must pay capital gains tax for whatever profit made over one-third of the new basis.
In New York State, if real estate is valued at over $1,000,000, it is subject to estate taxes. Regarding the transfer of ownership, quit-claim deeds often are used between family members in situations such as this when one heir is buying out the other. All parties must be agreeable to dropping a name from the title. For more information, consult the IRS Publication 950, “Introduction to Estate and Gift Taxes.” Order by calling (800) TAX-FORM or download from irs.gov.
What home-buying costs are deductible?
This is one of the more major real estate tax considerations. 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. Often, the maintenance costs and common charges that come with owning a co-op or condo are partially tax-deductable.
Other home-buying costs (closing costs in particular) are not immediately tax-deductible, but 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, 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.
Where do I get information on IRS publications?
The Internal Revenue Service publishes a number of real estate publications. These are available for free online or by calling (800) TAX-FORM.
They are listed by number:
521 “Moving Expenses”
523 “Selling Your Home”
527 “Residential Rental Property”
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”