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Your tax questions answered: Home

home_hazards.ju.top.jpg By Amy Feldman, contributor


(MONEY Magazine) -- Late last year you caught a break. Congress reached a deal that extended the Bush-era tax cuts for two years and renewed perks like the sales tax deduction and the tuition write-off for non-itemizers.

Through 2012, the top marginal income tax rate will continue to be 35%, and you'll keep paying just 15% on long-term capital gains and qualified dividends. Plus, in 2011 your paycheck will be a little plumper, thanks to a cut in the payroll tax.

While no one knows what 2012 will bring, this year-end resolution makes planning easier than when rates were in flux. No need to scramble to lock in gains or postpone deductions. But even if Congress eliminated short-term uncertainty, it did nothing to wipe out long-standing confusion about the tax code.

With the filing season underway, MONEY asked readers to share their toughest tax challenges.

From the more than 1,000 questions you submitted, we picked the investing, filing, retirement, home, and small-business topics most likely to lead you off course.

Here are the answers to the most common questions about your home.

1. In 2010 we weren't able to rent out the condo we own as an investment. Can we claim the $2,000 we spent on repairs and upkeep as a loss even though we have no income? -- Martha Steele, Sudbury, Vt.

Maybe, but when it comes to rental real estate, which falls under the IRS's "passive activity loss rules," things get complicated fast.

Generally, no "passive" income means you can't take "passive" losses. But if you're actively involved in managing the property, you may qualify for a special rule that entitles you to claim up to $25,000 in losses.

Your adjusted gross income, with some modifications, must fall below $100,000 (for all except married couples filing separately); a partial tax break is available if your modified AGI is $150,000 or below.

If this isn't you, report those repairs on your 2010 return anyway. You may get a tax break when you start collecting rental income again, or when you sell.

2. I'm doing a major home renovation this year. How much of the cost is deductible? -- Nakia Haskins, Brooklyn

There's no write-off for home renovation costs, but here's the silver lining: After you sell your house, you can add improvement expenses to the purchase price when you're calculating your cost basis, thereby trimming your gain and any tax bill.

Repairs like a paint job don't count, and the upgrade still has to be part of your home when you sell.

You can already exclude a large portion of the profit on a home from taxes -- $250,000 for singles, $500,000 for marrieds -- but depending on when you bought and how long you stay, you could exceed that.

However, as another Money reader suggested, you still may be able to squeeze some tax benefits out of your renovation now.

If you itemize and choose to deduct state sales taxes instead of state income taxes on your federal return, you can write off any sales taxes you paid on the renovation.

That can be an especially valuable strategy if you live in a state without an income tax, like Washington or Florida.

However, you then cannot add the sales taxes to your cost basis when you sell your home. For more details, see IRS Publication 530 at irs.gov.

Homebuyer tax credits

My wife and I bought a house in October of 2010. Is there still a tax credit we can take that we pay back over time? -- Michael Kirk, New Lenox, Ill.

You just missed it. The homebuyer tax credits, rolled out in 2008, ended last fall and were not revived for 2011.

Additional reporting by Anne C. Lee contributed to this article.  To top of page

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