Tax Tips - FAQ's from the Homeowner

1. Sale - Business Use or Rental of Home
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Some people rent out a portion of their home or use a portion for business purposes such as a separate room as office space.

Q - What are the tax ramifications of a later sale of the home?

A - If you sell the entire property you should consider the transaction as the sale of two properties. The sale of the part of your property used for business or rental is reported on Form 4797, Sales of Business Property. Under current IRS guidance, the personal portion is not reported unless the gain exceeds the $250,00 exclusion ($500,000 for a married couple filing a joint return). This may cause further allocation issues if improvements have been made to the property. Of course, any allocation of improvements and selling costs to the business or rental portion of or the property will serve to reduce the gain on the nonpersonal portion. In this instance careful records should be maintained to justify the allocation of improvements to the business or rental portion of the property.

2. Deductions - Real Estate Taxes
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Q - What taxes may I deduct?

A - Deductible real estate taxes are any state, local or foreign taxes on real property levied for the general public welfare. The taxes must be based on the assessed value of the property and must be charged uniformly against all property under the jurisdiction of the taxing authority. Deductible real estate taxes generally do not include taxes charged for local benefits and improvements that increase the value of the property. They also do not include itemized charges for services (such as trash collection) to specific property or people, even if the charge is paid to the taxing authority.

3. Sale of property - Basis
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Q - When I go to sell my property how do I determine its tax basis for purposes of determining gain or loss? What settlement items included on the purchase escrow statement are included in the tax basis?

A - The basis of property you buy is usually its cost. The cost is the amount you pay in cash, debt obligations, or other property. You cost may for example include (including items seen on the closing statement) amounts you pay for the following.

• Abstract fees (abstract of title fees)
• Charges for installing utility services
• Legal fees (including title search and preparation of the sales contract and deed)
• Recording fees
• Surveys
• Transfer taxes
• Title insurance
• Any amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commission

4. Sale of Property - Recognized Gain on Sale
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Q - How do the new rules work related reporting the sale of my home?

A- You are generally able to exclude up to $250,000 ($500,000 if married filing a joint return) of gain realized on the sale or exchange of a principal residence. The exclusion is allowed each time you sell or exchange a residence principal residence that meets the eligibility requirements, but generally no more frequently than once every two years. To be eligible for the exclusion, you must have owned the residence and occupied it as a principal residence for at least two of the last 5 years prior to the sale or exchange. If you fail to meet these requirements by reason of a change of place of emploiyment, health, or other unforeseen circumstances, you are eligible to exclude a fraction of the $250,000 equal to the percentage of two years that these requirements are met.

5. Deductions - Home Mortgage Interest Expense
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Q - How can I maximize the interest deduction from both my principal residence and my vacation home?

A - Generally, mortgage interest includes and interest you pay on a loan secured by you home. This includes a mortgage, second mortgage, a line of credit, and a home equity loan. Deductions for interest on home mortgage loans are generally allowed only if the loans are secured by your principal residence or second residence and only for loan principal up to $1 million. Home mortgage loans fall into two categories; acquisition indebtedness and home-equity loans. Acquisition indebtedness is debt incurred in acquiring, constructing, or substantially improving a qualified residence. Over time, acquisition indebtedness is reduced by principal payments. If you have repaid some of your "acquisition debt", it cannot be restored through refinancing, unless the excess is used to substantially improve your home. You can refinance your mortgage up the balance on the old mortgage and still deduct the interest. Home mortgage interest is also deductible on a home-equity loan to the extent that the loan does not exceed $100,000. Also, the home-equity debt must not exceed the fair market value of the qualified residence, reduced by the amount of acquisition indebtedness for that residence.