Tax Considerations - Q & A
| Q: |
Are taxes on second homes deductible? |
| A: |
Interest and property taxes are deductible on a second home if you itemize. Check with your accountant or tax adviser for specifics. |
|
| Q: |
What home-buying costs are deductible? |
| A: |
Any points you or the seller pay for your home loan are deductible for that year. Property taxes and interest are deductible every year.
But while other home-buying costs (closing costs in particular) are not immediately tax-deductible, they can be figured into the adjusted cost basis of your home when you go to sell (any significant home improvements also can be calculated into your basis). These fees would include title insurance, loan-application fee, credit report, appraisal fee, service fee, settlement or closing fees, bank attorney's fee, attorney's fee, document preparation fee and recording fees.
|
|
| Q: |
Explain the home mortgage deduction? |
| A: |
The mortgage interest deduction entitles you to completely deduct the interest on your home loan for the year in which you paid it. You must itemize deductions in order to do this, which means your total deductions must exceed the IRS's standard deduction.
Another point to remember is that the amount of interest on your loan goes down each year you pay on your mortgage (all standard home-loan formulas pay off interest first before significantly paying into principal). That's why paying extra on your principal every year can help you pay off your loan early.
|
|
| Q: |
Should I buy a vacation home? |
| A: |
Today a vacation home can be purchased for investment purposes as well as enjoyment. And yes, there are tax benefits.
Some people buy a vacation home with the idea of turning it into a permanent retirement home down the road, which puts them ahead on their payments. Another benefit is that the interest and property taxes are tax deductible, which helps to offset the cost of paying for a second home. A vacation home also can be depreciated if you live in it less than 14 days a year.
Resources:
* "Real Estate Investing From A to Z," William Pivar, Probus Publishing, Chicago; 1993.
* "The Ultimate Language of Real Estate,'' John Reilly, Dearborn Financial Publishing, Chicago; 1993.
|
|
| Q: |
Can you deduct the cost of home improvements? |
| A: |
What you spend on permanent home improvements, such as new windows, can be added into your home's cost basis, or amount of money invested in a home, which reduces capital gains when it comes time to sell. Capital gains are determined by the | |
