Buying a Home
Thinking about buying a home? How will this affect your tax situation? Most of the expenses incurred when buying a home are not deductible. There are, however, certain closing costs that are added to the basis of your residence. Keeping track of the basis of your home is important because when you sell, the basis is needed to calculate any gain or loss. The following closing costs incurred at purchase are added to the basis of your residence: brokers' commissions, attorney's fees, recording fees, abstract fees, surveys, title searches, owner's title insurance policy, and transfer taxes. These items are generally found on your closing settlement statement.

The following closing costs incurred at purchase are added to the basis of your residence: brokers' commissions, attorney's fees, recording fees, abstract fees, surveys, title searches, owner's title insurance policy, and transfer taxes. These items are generally found on your closing settlement statement.

Owning a Home
The IRS allows current-year deductions on certain expenses associated with owning your home.

Real Estate Taxes
You may deduct real estate taxes in the year paid. They are generally reported on Form 1098, Mortgage Interest Statement, the annual statement from the financial institution holding your mortgage. You should also deduct any prorated taxes collected from you at closing. These amounts are not always included on Form 1098, but may be itemized on your real estate closing statement.

Local Taxes and Assessments
Local taxes are deductible if they are for repairs and maintenance (not upgrading) of existing items on your property. Local assessments, such as for sidewalks, are not deductible but are an addition to your cost basis.

Mortgage Interest
The amount of mortgage interest you paid on your principal residence (or second home) is deductible. This amount is generally shown on Form 1098. You can also deduct all the "points" paid to purchase your residence, even though some may have been paid by the seller. If certain requirements are met, the points can be deducted in full in the year paid. Otherwise, they must be deducted over the life of the mortgage. Both the points paid by you and those paid by the seller are usually shown on your closing settlement statement. Seller-paid points you claim as an itemized deduction reduce the cost basis of your home.

While you own your home, keep a record of the cost of improvements you make that add value to your home, such as landscaping, patios, swimming pools, decks, room additions, and roof replacements. These items are additions to your cost basis. Repairs such as fixing leaks, repairing roofs, and painting are not deductible and are not basis additions. The cost of your own labor is not deductible.

Repairs & Improvements
The terms 'repairs' and 'improvements' can be confusing as they apply to the value of your home. A repair or maintenance expense is not tax deductible and cannot be added to the basis of your home. An improvement adds to the value of your home and is added to the basis. Adding vinyl siding and installing a security system are examples of improvements.

Real Estate Refinancing - Loan Points
When interest rates drop, there is often a mad rush to refinance home mortgages. Many homeowners assume that they may also deduct their points. If you use the proceeds of your new loan to make home improvements, you generally may deduct the loan points in the year you refinance. If only a portion of the loan is used to improve the home, only that portion of points is deductible in the year paid. The remainder must be deducted over the life of the loan.

Real Estate Refinancing - Home Improvements
Are you thinking about refinancing your home mortgage? The portion of points paid to refinance a loan not used to substantially improve your main residence is generally deductible in equal amounts over the life of the loan. Any points not deducted by the year the loan is paid off are usually fully deductible in the payoff year.

Casualty or Theft Loss
If your home is damaged from a sudden, unexpected event such as a fire, a storm, vandalism, or theft, the loss that is not covered by insurance is deductible subject to a $100 reduction and a 10% of adjusted gross income floor. A deductible casualty loss reduces the cost basis of your home by the amount claimed as a deduction.

Selling Your Home
The IRS allows up to $500,000 of the gain from the sale of a principal residence to be tax free if you are married and filing a joint return; $250,000 is nontaxable for a single person. To take the full exclusion, you must have owned and used the property as your principal residence for two of the last five years before the sale. If you move before satisfying the requirement due to a change in place of employment or a change in health, your exclusion will be adjusted by a proration based on the time spent in the home. Individuals serving on qualified official extended duty in the military can elect to suspend (for up to ten years) the five-year test period ending on the date of sale of the residence.

The exclusion or reduced exclusion can be taken an unlimited number of times by a seller of any age if all requirements are satisfied. Losses on the sale of your home are not deductible.