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Your home and taxes
Bought, sold or refinanced a home in 2003? Plan to do so in 2004? It's time for a tax recap
March 1, 2004: 10:57 AM EST
By Sarah Max, CNN/Money staff writer

BEND, Ore. (CNN/Money) – When it comes to taxes, there's no question that there are perks to being a homeowner.

You get to deduct the interest you pay on your mortgage and home equity, of course. Plus, gains in your home's value are, for the most part, excluded from capital gains taxes.

To get the most tax-benefits out of your home, it pays to brush up on your taxes. Here are all of the deductions and exclusions you can expect.

Initial mortgage costs

If you bought a home in 2003, you'll get some extra tax breaks. Points, which are the upfront fees a lender charges to give you the best interest rate, are tax deductible for the initial mortgage.

"This is because they're viewed as prepaid interest," said Mark Luscombe, principal analyst for CCH Incorporated. In other words, if you paid 1 point on a $300,000 mortgage, you'll be able to deduct $3,000 your taxable income for the year.

Even better, if the seller of the house paid your points for you, they're still yours to deduct, according to Andrew Martin, tax services product manager for Fiducial.

There is a catch. If you finance the points, you don't get to deduct them at once, noted Martin. You'll need to amortize them over the life of the loan. That $3,000 will work out to a $100 deduction for 2003 and each of the next 29 years.

Other closing costs related to acquiring the home, such as title insurance, are not deductible, but down the road they'll be added to your "basis" for capital gains purposes.

Refinancing costs

If you paid points to refinance, you can't deduct them all at once, but you can amortize the amount over the life of the loan. Again, that's $100 a year for a 30-year loan with $3,000 in points.

If you've refinanced more than one time, you can deduct the balance of points from the previous refinance. Using the same $3,000 example, if you refinanced two years ago and have deducted $100 for each of the past two years, you can deduct the remaining $2,800 this year.

Property taxes

Although property taxes are an extra toll associated with home ownership, they are deductible. Keep in mind that the IRS only lets you deduct the taxes you actually paid for a given year, noted Luscombe. So, if you got your tax bill in November but opted to only pay half of it in 2003, you don't get to deduct the second half until 2004.

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Similarly, if you set aside your taxes by including them in your monthly payment to your lender, you'll only be able to deduct those taxes if your lender sent in your property tax payment before December 31, added Martin. "Sometimes lenders don't pay before the end of the year," he said.

If you bought a house in 2003 and paid a portion of the property taxes when you closed, don't forget to account for that amount.

Mortgage interest

Mortgage interest is deductible for your first and second homes, as long as the combined balance of your mortgages is less than $1 million, said Luscombe. If you rent out your second home, though, you have to stay in it 14 days of the year or 10 percent of the days it's rented, whichever is greater.

Interest on home equity loans and lines of credit is all deductible, as long as the loan is less than $100,000 or less than the equity you have in the house, whichever amount is smaller.

If you are subject to the alternative minimum tax (AMT), home equity interest is only deductible if it is related to improving or repairing your home, said Luscombe. If you aren't subject to AMT you can use home equity for any purpose and still get a tax break.

Home office or rental deduction

If you use a portion of your house as a home office or rent it out, you can depreciate that portion of your house. In other words, if you paid $300,000 for your house and your office or rental represents 10 percent of the total square footage, you'll have $30,000 to depreciate over 39 years, which is the life of commercial property. That's $769 you can deduct each year.

Keep in mind, however, that when you sell the house you will have to pay capital gains taxes – at a 25 percent rate – on the total amount you depreciated. If you live in the house for five years, deduct $769 a year and sell at a gain, for example, you'll pay $961 in taxes.

Capital gains

For most homeowners, the home is the biggest tax shelter of all – assuming it's your primary residence for at least two years. Married couples who both live in the house for two years don't pay taxes on gains of $500,000 or less, while single homeowners can exclude gains of $250,000 or less.

According to Luscombe, you only need to live in the house for two out of five years to qualify for this exclusion, and those years don't have to be consecutive. For example, if you have a summer house and a winter house, you can split your time between the two as long as your total time in each house adds up to two years within a five-year period.

Now, if you live in your house for 23 months and sell, you're out of luck. You'll have to pay the long-term capital gains rate on any profit. Your gain is calculated by looking the difference between your "basis" – what you paid plus initial closing costs or home improvements – and the selling price, minus broker fees or closing costs you pay.

For sales on or before May 5, 2003 that rate is 20 percent for people in the 25 percent tax bracket and up; it's 10 percent for people in the 10- and 15-percent tax brackets. For sales after May 5, that rate is 15 percent for the higher brackets and 5 percent higher for the lower brackets.

If you live in the house for less than a year, you pay ordinary income tax.

There are some exceptions. If a change in employment, health or unforeseen circumstances – such as divorce or a twin pregnancy – force you to move, the capital gains will be prorated. In this case, if you live in the house for one year, only half of your gains will be taxed, and at the long-term rate.  Top of page




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Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer. Morningstar: © 2018 Morningstar, Inc. All Rights Reserved. Factset: FactSet Research Systems Inc. 2018. All rights reserved. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2018 and/or its affiliates.