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Q: |
What is the
Mortgage Credit Certificate program? |
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A: |
The Mortgage
Credit Certificate program allows first-time home buyers
to take advantage of a special federal income tax
credit. This program allows buyers credit in qualifying
for the tax advantage they'll receive after they
purchase the home.
The amount of the credit is tied to a local formula
that every city with an MCC program must follow. An MCC
credit, which can total $2,000 or more, reduces the
borrower's federal tax liability by an amount tied to
how much one pays in annual mortgage interest. Both the
borrower's income and the purchase price of the home
must fall within established guidelines.
To see if your community has an MCC program, call
your local housing or redevelopment agency. You also may
inquire with your real estate broker or the local
association of Realtors. |
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Q: |
Are taxes on
second homes deductible? |
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A: |
Interest and
property taxes are deductible on a second home if you
itemize. Check with your accountant or tax adviser for
specifics. |
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Q: |
What
home-buying costs are deductible? |
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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.
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Q: |
How do you
choose between buying and renting? |
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A: |
Home ownership
offers tax benefits as well as the freedom to make
decisions about your home. An advantage of renting is
not worrying about maintenance and other financial
obligations associated with owning property.
There also are a number of economic considerations.
Unlike renters, home owners who secure a fixed-rate loan
can lock in their monthly housing costs and make prudent
investment plans knowing these expenses will not
increase substantially.
Home ownership is a highly leveraged investment that
can yield substantial profit on a nominal front-end
investment. However, such returns depend on home-price
appreciation.
"For some people, owning a home is a great feeling,"
writes Mitchell A. Levy in his book, "Home Ownership:
The American Myth," Myth Breakers Press, Cupertino,
Calif.; 1993.
"It does, however, have a price. Besides the
maintenance headache, the amount of after-tax money paid
to the lender is usually greater than the amount of
money otherwise paid in rent," Levy concludes.
As for evaluating the risk associated with home
ownership, David T. Schumacher and Erik Page Bucy write
in their book "The Buy & Hold Real Estate Strategy,"
John Wiley & Sons, New York; 1992, that "good property
located in growth areas should be regarded as an
investment as opposed to a speculation or gamble."
The authors recommend that prospective buyers spend a
few months investigating a community. Many people make
the mistake of buying in the wrong area.
"Just because certain properties are high-priced
doesn't necessarily mean they have some inherent
advantage," the authors write. "One property may cost
more than another today, but will it still be worth more
down the line?" |
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Q: |
Explain the
home mortgage deduction? |
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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.
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Q: |
Should I buy a
vacation home? |
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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.
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Q: |
Are there tax
credits for first-time home buyers? |
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A: |
Many city and
county governments offer Mortgage Credit Certificate
programs, which allow first-time home buyers to take
advantage of a special federal income tax write-off,
which makes qualifying for a mortgage loan easier.
Requirements vary from program to program. People
wanting to apply should contact their local housing or
community development office.
Here is a list of four general requirements to keep
in mind:
* Some credit may be claimed only on your owner-occupied
principal residence.
*There are maximum income limits, which vary by locality
and family size.
* You must be a first-time home buyer, which means you
must not have had any kind of ownership interest in a
principal residence during the past three years. This
restriction may be waived, however, if you are buying
property within certain target areas.
* Allocations must be available. A local MCC program may
have to decline new applications when it runs out of
funds. |
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Q: |
Are
seller-paid points deductible? |
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A: |
As of Jan. 1,
1991, homeowners have been able to deduct points paid by
the seller. This deduction previously was reserved only
for points actually paid by the buyer. |
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Q: |
How do I save
on taxes? |
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A: |
Here are some
ways to save money on taxes:
* Mortgage interest on loans up to $1 million is
completely deductible for the year in which you pay it
to buy, build or improve your principal residence plus a
second home.
* Points, or loan origination fees, also are deductible
no matter who pays them, the buyer or the seller.
* Most homeowners, except the wealthy and those living
in high-priced markets, no longer need to worry about
capital gains taxes. The exemption has been raised to
$500,000 for married couples and $250,000 for single
owners. It can be taken every two years. Homeowners
should always keep all receipts of permanent home
improvements and of mortgage closing costs. If you do
have to pay capital gains taxes, these costs can be
added to your adjusted cost basis. Consult your tax
adviser for more information.
Resources:
* "Tax Information for First-Time Homeowners," IRS
Publication 530, and "Selling Your Home," IRS
Publication 523. Call (800) TAX-FORM to order.
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Q: |
Why buy a
house? |
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A: |
Here are some
frequently cited reasons for buying a house:
* You need a tax break. The mortgage interest
deduction can make home ownership very appealing.
* You are not counting on price appreciation in the
short term.
* You can afford the monthly payments.
* You plan to stay in the house long enough for the
appreciation to cover your transaction costs. The costs
of buying and selling a home include real estate
commissions, lender fees and closing costs that can
amount to more than 10 percent of the sales price.
* You prefer to be an owner rather than a renter.
* You can handle the maintenance expenses and headaches.
* You are not greatly concerned by dips in home values.
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Q: |
What are the
rules for mortgage credit certificates? |
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A: |
To qualify for
a mortgage credit certificate, both your income and the
purchase price of the home must fall within established
city guidelines. These guidelines vary by city but
generally only permit people who earn an average income
or slightly higher than average income.
A limited number of cities have authorized the MCC
program. Contact your municipal housing department for
more information. |
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Q: |
Are points
deductible? |
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A: |
Points paid by
the buyer or the seller are deductible for the year in
which they are paid. |
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Q: |
Where do I get
information on IRS publications? |
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A: |
The Internal
Revenue Service publishes a number of real estate
publications. They are listed by number:
* 521 "Moving Expenses"
* 523 "Selling Your Home"
* 527 "Residential Rental Property"
* 534 "Depreciation"
* 541 "Tax Information on Partnerships"
* 551 "Basis of Assets"
* 555 "Federal Tax Information on Community Property"
* 561 "Determining the Value of Donated Property"
* 590 "Individual Retirement Arrangements"
* 908 "Bankruptcy and Other Debt Cancellation"
* 936 "Home Mortgage Interest Deduction"
Order by calling 1-800-TAX-FORM. |
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Q: |
How do I reach
the IRS? |
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A: |
To reach the
Internal Revenue Service, call (800) TAX-1040.
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Q: |
How are fees
and assessments figured in a homeowners association?
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A: |
Homeowners
association fees are considered personal living expenses
and are not tax-deductible. If, however, an association
has a special assessment to make one or more capital
improvements, condo owners may be able to add the
expense to their cost basis. Cost basis is a term for
the money an owner spends for permanent improvements
throughout their time in the home and is used to reduce
eventual capital gains taxes when the property is sold.
For example, if the association puts a new roof on a
building, the expense could be considered part of a
condo owner's cost basis only if they lived directly
underneath it. Overall improvements to common areas,
such as the installation of a swimming pool, need to be
considered on a case-by-case basis but most can be
included in the cost basis of any owner who can show
their home directly benefits from the work.
To find out more about how the IRS views condo
association fees, look to IRS Publication 17, "Your
Federal Income Tax," which includes a section on condos.
Order a free copy by calling (800) TAX-FORM.
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