Many real estate tax deductions easy to forget

Posted on February 13 By MLP Blog

Ten that are often missed include mortgage points, prepayment penalty, job-related moving expenses

Have you ever forgotten to claim a real estate tax deduction? I did. Years ago, after I filed my income-tax returns, I remembered a mortgage interest deduction of about $4,500, which I totally overlooked. To claim my refund, I had to file IRS Form 1040X to amend my tax return.

As a result, I learned the IRS hates to part with tax dollars already collected. Just so you never make a tax-deduction mistake like that, here are some of the most-forgotten real estate tax deductions:

1. Deduct loan-fee points paid for a home mortgage. If you bought a house or condo in 2006 as your principal residence, you probably paid the mortgage lender loan-fee points. One point equals 1 percent of the amount borrowed.

When the purpose of the loan was to acquire your residence, the loan fee is tax-deductible as itemized interest. However, many mortgage lenders forget to include this loan fee, which can be several thousand dollars, on the borrower’s year-end IRS Form 1098 mortgage interest report.

For example, suppose you obtained a $300,000 mortgage to buy your house or condo (not a rental property). You paid a one-point loan fee of $3,000 to the lender. Because it was a primary-residence, home-acquisition mortgage, that $3,000 fee qualifies as a Schedule A itemized interest deduction on your tax returns.

Double-check the lender’s 1098 interest report to be certain it includes loan-fee points. If not, add them to your itemized deduction. The best proof is your closing settlement statement.

2. Deduct amortized mortgage-refinance fees paid to the lender. If you refinanced your home loan in 2006 (probably to get rid of an adjustable-rate mortgage or reduce your interest rate), or obtained a new or refinanced mortgage on a rental investment property and paid the lender a loan fee, usually called points, that fee is deductible over the life of the mortgage.

The reason many borrowers pay a loan fee on a refinanced mortgage is paying points slightly lowers the interest rate. The general rule is for each point (1 percent) paid, the interest rate should drop by an eighth to a fourth of a percentage point.

But it is easy to forget this deduction because it is often a small annual amount. Suppose you refinanced your home loan (or the mortgage on your vacation second home). Because it was not a home-acquisition mortgage, the loan fee must be amortized (deducted) over the life of the mortgage.

3. Deduct any mortgage prepayment penalty you paid. If you had to pay your mortgage lender a prepayment penalty, either to refinance or sell your property and pay off the old mortgage, that prepayment penalty is tax-deductible as mortgage interest.

4. Deduct prior home-loan refinance fees. If you have not fully deducted mortgage refinance loan fees from a previous refinance, or you paid in full a mortgage on any property with undeducted loan fees, remember to deduct those fees in the year the mortgage was paid in full.

To illustrate, if you refinanced or sold a property in 2006 with $3,000 of remaining undeducted mortgage loan fees, that $3,000 became fully deductible in the year the mortgage was paid in full.

5. Remember to deduct moving costs if you change your job and residence location in 2006. Whether you are a renter or a homeowner, if you changed both your job site and your residence location in 2006, you might be eligible for the often-overlooked moving-expense deduction.

To qualify for this sometimes-huge tax deduction of several thousand dollars, your new job location must be at least 50 miles farther from your old home than was your old job site. The residence change must occur within a year of the job-location change, either before or after it. It doesn’t matter if you change employers or become self-employed.

For example, suppose it was three miles from your old home to your old job location. But your employer moved to a new location that is 60 miles from your old home. If you also changed your residence location within a year, your moving costs qualify in this example as tax deductions because the new job was more than 50 miles away.

Use IRS Form 3903 to calculate and claim your moving-cost deductions. However, as that form explains, you must work at least 39 weeks in the next 52 weeks in the vicinity of the new work site. If you are self-employed, you must work at least 78 weeks in the next 104 weeks in the area of your new job location. Either spouse can qualify, but part-time work doesn’t count.

6. Deduct any uninsured casualty loss. Another often-forgotten tax deduction has the misleading name of a casualty-loss deduction.

If you suffered a fully or partly uninsured “sudden, unusual or unexpected loss” in 2006, you qualify. Examples include losses from fire, flood, hurricane, tornado, earthquake, mudslide, theft, accident, water damage, riot, vandalism, embezzlement, snow, rain and ice.

The casualty-loss tax deduction must exceed 10 percent of your 2006 adjusted gross income, plus a $100 floor per casualty event. To illustrate, suppose your uninsured casualty loss was $5,000 and your 2006 adjusted gross income was $30,000. That means you qualify for a deduction of $5,000 minus $3,000 minus $100, or $1,900.

7. Deduct prorated property tax in the year of a home sale or purchase. Many home sellers and buyers forget to deduct their share of the prorated property taxes in the year of sale or purchase. Your best proof of payment is the closing settlement statement, even if the other party to the sale actually paid the tax collector.

8. Deduct prorated mortgage interest for a home sale or purchase. If you bought or sold your home in 2006 and you assumed an existing mortgage, bought “subject to” or relinquished a mortgage, remember to deduct your share of the prorated mortgage interest for the month of the home sale or purchase. Again, the closing settlement statement is the best proof.

9. Deduct prepaid property taxes and mortgage interest.

10. If your home is on leased land, deduct ground rent. To qualify, Internal Revenue Code 163(c) permits homeowners living on leased land to deduct their ground rent payments if a) the ground lease is for at least 15 years, including renewal periods; b) the land lease is freely assignable to the buyer of the home; c) the land owner’s interest is primarily a security interest (similar to a mortgage); and d) you have a current or future option to buy the land beneath your home.

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