Not all homeownership expenses are tax-deductible

Not all homeownership expenses are tax-deductible
By Stephen Fishman

Most people know that homeownership comes with great tax breaks: home mortgage interest and property taxes are deductible from federal income tax as itemized deductions. The value of these deductions should always be factored in when determining the true cost of homeownership.

However, homebuyers should be aware many of the costs of buying and owning a home are not deductible.

You cannot deduct any of the following items:

•insurance (other than mortgage insurance premiums), including fire, title and homeowners insurance;
•rent for occupying the home before closing;
•wages you pay for domestic help;
•depreciation;
•the cost of utilities, such as gas, electricity, or water; or
•forfeited deposits, down payments, or earnest money.
Real estate taxes

Homeowners can deduct property taxes based on the assessed value of their real property. However, not all charges imposed on homeowners by local taxing authorities are deductible. These nondeductible charges include charges for services.
The Internal Revenue Service says that an itemized charge for services to specific property or people is not considered tax, even if it is paid to the taxing authority. You cannot deduct a charge as a real estate tax if it is:

•a unit fee for the delivery of a service (such as a $5 fee charged for every 1,000 gallons of water you use);
•a periodic charge for a residential service (such as a $20 per month or $240 annual fee charged for trash collection); or
•a flat fee charged for a single service provided by your local government (such as a $30 charge for mowing your lawn because it had grown higher than permitted under a local ordinance).
You must look at your real estate tax bill to decide if any nondeductible itemized charges are included in the bill. If your taxing authority (or lender) does not furnish you a copy of your real estate tax bill, ask for it.

Assessments for local benefits

You also cannot deduct amounts you pay for local benefits that tend to increase the value of your property, such as assessments for the construction of streets, sidewalks, or water and sewer systems. You must add these amounts to the basis of your property.

You can, however, deduct assessments (or taxes) for local benefits if they are for maintenance, repair, or interest charges related to those benefits. An example is a charge to repair an existing sidewalk and any interest included in that charge.

If only a part of the assessment is for maintenance, repair or interest charges, you must be able to show the amount of that part to claim the deduction. If you cannot show what part of the assessment is for maintenance, repair or interest charges, you cannot deduct any of it.

An assessment for a local benefit may be listed as an item in your real estate tax bill. If so, use the rules in this section to find how much of it, if any, you can deduct.

Homeowners association assessments

You cannot deduct homeowners association assessments because the homeowners association, rather than a state or local government, imposes them.

The interest paid on a mortgage or mortgages of up to $1 million for a principal residence and/or second home is deductible as an itemized deduction.

Home loans

In addition, homeowners can borrow up to $100,000 against the equity in their home and deduct the interest as an itemized deduction. However, lender charges connected with getting or refinancing a mortgage loan are not deductible, including:

•loan assumption fees;
•cost of a credit report, and fee for an appraisal required by a lender;
•notary fees; and
•preparation costs for the mortgage note or deed of trust.
Settlement costs

The following settlement costs are not deductible, but may be added to the home's basis. This will reduce the amount of any taxable profit when the home is sold:

•abstract fees (abstract of title fees);
•charges for installing utility services;
•legal fees (including fees for the title search and preparation of the sales contract and deed);
•recording fees;
•surveys;
•transfer or stamp taxes;
•owner's title insurance; and
•any amount the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, cost for improvements or repairs, and sales commissions.

A REAL ESTATE BROKER IS NOT QUALIFIED TO GIVE LEGAL AND TAX RELATED ADVICE. THE INFORMATION ON THIS BLOG POST IS FOR GENERAL KNOWLEDGE ONLY. YOUR SPECIFIC TAX SITUATION WILL DEFINITELY BE SINGULARLY UNIQUE. THE MANNER OF TAKING TITLE MAY HAVE SIGNIFICANT LEGAL AND TAX CONSEQUENCES. PLEASE CONSULT AN APPROPRIATE PROFESSIONAL.

For Buying or Selling, it helps to have a guide that gives you straight answers. For more information on buying, selling, or renting out an income property in San Diego, please call Frank Rashid's cell phone at (858) 676-5250 or email him at rashid@rashidrealty.com. More to follow within the next couple of weeks.