The Homeowner, Seller and Buyer’s Guide To Filing Taxes by Jim Mesveskason March 11, 2016 The process of buying and selling a house has evolved over the years but one thing has remained the same, taxes. When buying, selling, or even renovating a home, there are tax benefits and penalties that all homeowners must be aware of. The last thing a homeowner needs is to receive a penalty letter for not paying taxes on something they should have. Worse than that, you could end up paying too much in taxes by failing to take advantage of the exclusions and deductions made available by the IRS.
Home Ownership: When purchasing a home there are three important deductions to be aware of: points, mortgage interest, and property tax deductions. There are other tax benefits for homeowners, but they vary based on the state in which you own your home.
Mortgage points are a fee charged by the lender that is usually 1-2 percent of the total loan amount. Most buyers are not aware that these “points” can be used as deductions on your tax return. The handling of the mortgage points depends on who pays the fee and if it meets certain criteria set forth by the IRS. The criteria that the IRS specifies are this: It must stay within regional averages and not exceed certain yearly set limits. If the mortgage points meet these requirements and are paid by the buyer, they can use this payment as a deduction similar to paying interest on your mortgage. If the seller pays the fee, they can use the points to increase their basis in the home. An owner’s basis in a home is the amount they originally paid for the home plus any additional renovations and fees (ex. Points). There are some instances where the basis can be decreased as well. Once the basis in the home is determined, that is the number that the IRS will use to determine the gain/loss the owner receives from selling their home. If the points paid do not meet the criteria set forth by the IRS, they are not eligible to be deducted the year they are paid. They can, however, be deducted in even amounts over the life of the loan. So if you have a 30-year mortgage, you can take the points paid and divide it out over the 30 years.