| What You Can Expect From Your New Home | | | | deductible settlement costs will be of little or no value |
| When one acquires his or her first new home, there is | | | | to the happy home owners. They would have been |
| great expectation of a new income tax deduction. This | | | | better off to push settlement over to January and into |
| expectation exists for both single folks and married | | | | a year where they would have twelve mortgage |
| couples as they wander into the new world of | | | | payments, real estate taxes, and could make |
| itemized deductions. No more do we get to fill out the | | | | maximum use of deductible settlement costs. Please |
| short income tax forms, we must now use federal | | | | plan your transaction accordingly. |
| form "schedule A" to get the tax goodies that others | | | | Going Forward |
| have promised. What lies in store for the first time | | | | Looking ahead, the first time home owner can look |
| home buyer? What income tax benefits really do exist | | | | forward to deducting mortgage interest expense from |
| and how does the first time home buyer go about | | | | their income taxes. This is true as long as their original |
| getting the benefits? This is what we came to discuss | | | | acquisition debt does not exceed $1 million. Real estate |
| and we will not rest until a firm understanding of first | | | | taxes will also be deductible providing that the home |
| time home buying is reached. | | | | owner or owners are not in the alternative minimum |
| Step One-The Settlement | | | | tax. Assuming that alternative minimum tax does not |
| Before moving into a new residence, the all anticipated | | | | apply, the first time home buyer can expect to get tax |
| settlement date must arrive. Are there income tax | | | | deductions for both the mortgage interest and the real |
| deductions on the settlement sheet? There certainly | | | | estate taxes paid during the year. It is even possible to |
| could be. If points are paid to obtain financing, these | | | | get the tax advantages of home ownership |
| points are income tax deductible and include points | | | | immediately by changing withholding allowances. |
| paid by the seller. There must be enough money paid | | | | Let's assume that a single taxpayer will have $20,000 |
| by the borrower at settlement to cover the amount of | | | | in mortgage interest deductions and $4,000 in real |
| points paid in order to get a current income tax | | | | estate taxes. Because this taxpayer's standard |
| deduction. When seller paid points are taken as a tax | | | | deduction of $5,150 is built in to the tax withholding |
| deduction, the cost basis of the home must be | | | | tables, we know that he can take an additional $18,150 |
| reduced by the seller paid points. For example, if a | | | | in deductions ($24,000 less the standard deduction of |
| new home is purchased for $400,000, and the seller | | | | $5,150). In order to get the tax benefit currently, the |
| pays one point or $4,000, the buyer can deduct this | | | | taxpayer would file a new W-4 form (withholding |
| amount but will reduce the home's cost basis to | | | | allowances form) with the payroll department where |
| $396,000. The deduction of points in the year of | | | | he works. This taxpayer would be eligible to claim an |
| settlement is unique to the purchase of a principal | | | | additional 5 exemptions ($18,150 divided by $3,300 |
| residence. Any other purchase of real estate would | | | | which is the personal exemption allowance) which |
| require the amortization of points to expense over the | | | | would thane serve to increase net pay over the |
| life of the loan. | | | | upcoming weeks. |
| Real estate taxes paid at settlement are also | | | | This process works similarly for married couples |
| deductible. This is the amount on page one of the | | | | except that the standard deduction used for |
| settlement sheet that reimburses taxes paid by the | | | | determining additional deductions is $10,300. I should |
| seller in advance of his leaving the property. Taxes | | | | mention this caution. If both husband and wife work, |
| placed in escrow (usually displayed on page two of | | | | each has a standard deduction built-in to their |
| the settlement sheet) are not currently deductible as | | | | respective withholding tables. In this case, the amount |
| settlement expenses but will be deductible when | | | | that is used to calculate excess deductions is $20,600. |
| disbursed by escrow. The remaining items on the | | | | Don't forget that other deductions making up itemized |
| settlement sheet are not currently deductible and | | | | deductions include state income taxes withheld or paid, |
| should be capitalized as cost of the residence. | | | | charitable contributions, casualty and theft losses, |
| The time of year that settlement on a new residence | | | | medical expenses exceeding adjusted gross income |
| occurs can have a significant impact on the availability | | | | limits, and miscellaneous deduction (typically from |
| of income tax deductions. For instance, suppose a | | | | un-reimbursed employee business expenses). |
| married couple settles on a new home in December. | | | | Remember, if a taxpayer is in the alternative minimum |
| Because this is their first home, they have not been | | | | tax, there will be no benefit for income and real estate |
| itemizing deductions but instead have been using the | | | | taxes paid and no benefit for miscellaneous itemized |
| standard deduction of $10,300 (2006 standard | | | | deductions. This is supposed to be a simple overview |
| deduction for married couples filing a joint return). They | | | | of what a new homeowner can expect in the way of |
| will not make their first mortgage payment until January | | | | income tax benefits. Unfortunately, nothing is ever |
| of the next year. Because of this, it is likely that the | | | | really simple. |