(This is Part 8 of an eight-part series.)
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 mortgageinterest deduction of about $4,500, which I totally overlooked. To claim my taxrefund, I had to file IRS Form 1040X to amend my tax return.
As a result, I then learned the IRS hates to part with taxdollars already collected. I had to provide details of my additional deduction.
Purchase Bob Bruss reports online.
Fortunately, that was easy because it was a mortgageinterest deduction for a recently acquired rental property. I photocopied thelender’s IRS Form 1098, mailed it to the IRS, and about a month later receivedmy tax refund.
Just so you never make a tax-deduction mistake like that,here are the “top 10” most often forgotten real estate taxdeductions:
1. DEDUCT LOAN FEE “POINTS” PAID TO OBTAIN A”HOME-ACQUISITION MORTGAGE.” If you bought a house or condo in2006 as your principal residence, you probably paid the mortgage lenderloan-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 mortgagelenders “forget” to include this loan fee, which can be severalthousand dollars, on the borrower’s year-end IRS Form 1098 mortgage interestreport.
For example, suppose you obtained a $300,000 mortgage to buyyour 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-acquisitionmortgage, that $3,000 fee qualifies as a Schedule A itemized interest deductionon your tax returns.
Doublecheck the lender’s 1098 interest report to be certainit includes loan-fee points. If not, add them to your itemized deduction. Thebest proof is your closing settlement statement.
2. DEDUCT AMORTIZED MORTGAGE REFINANCE FEES PAID TO THELENDER. If you refinanced your home loan in 2006 (probably to getrid of an adjustable-rate mortgage or reduce your interest rate), or obtained anew or refinanced mortgage on a rental investment property and paid the lendera loan fee, usually called points, that fee is deductible over the life of themortgage.
The reason many borrowers pay a loan fee on a refinancedmortgage is paying points slightly lowers interest rate. The general rule isfor each one point (1 percent) loan fee paid, the interest rate should drop atleast one-eighth to one-fourth percent.
But it is very easy to forget this deduction because it isoften a small annual amount. Suppose you refinanced your home loan (or themortgage on your vacation second home). Because it was not a home-acquisitionmortgage, the loan fee must be amortized (deducted) over the life of themortgage.
To illustrate, if you paid a $2,000 loan fee to obtain a new30-year refinanced mortgage, you can deduct $66.66 each year for the next 30years. Because it’s not much of an annual deduction, which is easy to forget,it’s often wiser to obtain a “no fee” mortgage rather than pay a loanfee for other than a home-acquisition mortgage.
3. DEDUCT MORTGAGE PREPAYMENT PENALTY YOU PAID. If youhad to pay your mortgage lender a prepayment penalty, either to refinance orsell your property and pay off the old mortgage, that prepayment penalty istax-deductible as mortgage interest. Some home loans have these prepaymentpenalties during just the first few years, but investment property mortgagesoften have them for many more years.
4. DEDUCT PRIOR HOME-LOAN REFINANCE FEES. If youhave 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 in2006 with $3,000 of remaining undeducted mortgage loan fees, that $3,000 becamefully deductible in the year the mortgage was paid in full (either byrefinancing or by sale of the property).
5. REMEMBER TO DEDUCT MOVING COSTS IF YOU CHANGED JOBLOCATION AND YOUR RESIDENCE IN 2006. Whether you are a renter or ahomeowner, if you changed both your job site and your residence location in2006, you might be eligible for the often-overlooked moving-expense deduction.
To qualify for this sometimes-huge tax deduction ofseveral thousand dollars, your new job location must be at least 50 milesfurther away from your old home than was your old job site. The residencechange must occur within 12 months before or after the job location change. Itdoesn’t matter if you change employers or become self-employed.
For example, suppose it was three miles from your old hometo your old job location. But your employer moved to a new location, which is60 miles from your old home. If you also changed your residence location within12 months, your moving costs qualify in this example as tax deductions becausethe new job was more than 53 miles away.
Use IRS Form 3903 to calculate and claim your moving-costdeductions. However, as this form explains, you must work at least 39 weeksduring the next 52 weeks in the vicinity of the new work site. If you areself-employed you must work at least 78 weeks during the next 104 weeks in thearea of your new job location. Either spouse can qualify, but part-time workdoesn’t count.
6. DEDUCT ANY UNINSURED CASUALTY LOSS. Anotheroften-forgotten tax deduction has the misleading name of a casualty-lossdeduction.
If you suffered a fully or partially uninsured”sudden, unusual or unexpected loss” in 2006, you qualify. Examplesinclude losses from fire, flood, hurricane, tornado, earthquake, mudslide,theft, accident, water damage, riot, vandalism, embezzlement, snow, rain andice.
However, slow losses do not qualify, such as termite damage,rust, erosion, mold, corrosion, dry well, moth damage, dry rot, beetles andDutch elm tree disease.
The casualty-loss tax deduction must exceed 10 percent ofyour 2006 adjusted gross income, plus a $100 “floor” per casualtyevent. To illustrate, suppose your uninsured casualty loss was $5,000 and your2006 adjusted gross income was $30,000. That means you qualify for a deductionof $5,000 minus $3,000 minus $100, or $1,900.
7. DEDUCT PRO-RATED PROPERTY TAX IN YEAR OF HOME SALE ORPURCHASE. Many home sellers and buyers forget to deduct their shareof the pro-rated property taxes in the year of sale or purchase. Your bestproof of payment is the closing settlement statement, even if the other partyto the sale actually paid the tax collector.
8. DEDUCT PRO-RATED MORTGAGE INTEREST FOR HOME SALE ORPURCHASE. If you bought or sold your home in 2006, and you assumedan existing mortgage, bought “subject to” or relinquished a mortgage,remember to deduct your share of the pro-rated mortgage interest for the monthof the home sale or purchase. Again, the closing settlement statement is thebest proof.
9. DEDUCT PREPAID PROPERTY TAXES AND MORTGAGE INTEREST. Mypersonal favorite, often-overlooked deduction is prepaid property taxes andmortgage interest.
For example, in December 2006 I prepaid my January 2007mortgage payment, thus entitling me to deduct the substantial amount of prepaidmortgage interest. In addition, I prepaid my 2007 property taxes in 2006,entitling me to another large 2006 tax deduction. However, not all local taxcollectors will accept property tax prepayments.
10. IF YOUR HOME IS ON LEASED LAND, DEDUCT GROUND RENT.Thousands of homeowners are not aware of this little-known tax deduction ifthey pay ground rent.
To qualify, Internal Revenue Code 163(c) permitshomeowners 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) theland lease is freely assignable to the buyer of the home; (c) the land owner’sinterest is primarily a security interest (similar to a mortgage); and (d) youhave a current or future option to buy the land beneath your home.
If your situation meets all four of these tests, your groundrent payment to the landowner is tax-deductible as itemized interest. However,if you rent a “lot” or “pad” in a mobile home park, yourmonthly rent paid to the park owner is not deductible unless you have a 15-yearor longer lease with a land purchase option.
HOMEOWNER NONDEDUCTIBLE PAYMENTS.Nondeductible payments into a mortgage escrow impound account held by yourmortgage lender are not immediately deductible. However, when the mortgagelender remits money from your escrow account to the local property taxcollector, then the property taxes paid become deductible. Butpersonal-residence insurance payments are not tax-deductible.
Of course, if you pay your property taxes direct to thelocal tax collector, as millions of homeowners do, your property tax paymentbecomes deductible when paid.
If you bought or sold a home in 2006, you probably paidclosing costs such as a transfer tax, recording fees, escrow, title or attorneyfees, sales commission and other nondeductible charges. Home buyers should addthese nondeductible fees to their purchase price cost basis. But home sellersshould subtract these nondeductible costs from their gross sales price. Fulldetails on these and other homeowner and real estate tax deductions areavailable from your tax adviser.
Reprints of the entire “2007 Realty Tax Tips: EightChapters of Tax Savings for Homeowners and Realty Investors” are nowavailable for $5 from Robert Bruss, 251 Park Road, Burlingame, Calif., 94010,and by credit card at 1-800-736-1736 or instant Internet delivery at
(For more information on Bob Bruss publications, visit his
Real Estate Center).
Copyright 2007 Inman News