Claim Your Home Mortage Interest Deduction

December 15, 2015 By Chris Leave a Comment

Since 1913, American homeowners have been able to claim a mortgage interest deduction from their federal income taxes. There are limitations however; interest paid on first & second mortgages, lines of credit secured by real estate, and home equity lines of credit valued up to $1,000,000.00 or $500,000.00, if married and filing separately, is able to be deducted. After those limits are reached the remaining interest is not deductible.

Claiming Your Mortgage Interest Deduction

What do I need to do it claim the deduction?

First, fill out IRS Schedule A to determine whether your itemized deductions, including your mortgage interest, exceed your standard deduction. If they do, you’ll need to file the 1040 long form. Second, you’ll need Form 1098, your Mortgage Interest Statement, from your mortgage lender. This details the amount of interest and mortgage-related expenses you paid during the tax year you are filing for. Third, if you bought the property in the year for which you are filing, you’ll need the HUD-1 Settlement Statement form from your lender. This itemizes the fees you paid when you closed your loan.

If you prepare your own taxes, check out IRS Publication 936, the Home Mortgage Interest Deduction, and the instructions for filing Schedule A. If you use an accountant, he or she may simply need Form 1098 and the HUD form, but double check whether any additional documents are necessary.

Who qualifies for the deduction?

In order to qualify you must be legally liable for the loan. In other words, you’re not able to deduct mortgage payments you’ve made for someone else unless you’re legally liable to make the payments. Also, a qualified home, i.e. your primary or second home, must secure the mortgage. And, be sure to double-check that the mortgage interest deduction you claim on Schedule A and the amount on Form 1098 are the same.

Additionally, keep your 1098 Form and any worksheets you use to figure the amount of your deduction along with a copy of your return for as long as is legally necessary. If you need additional information, check the IRS for their guidelines.

Editor’s note: This post was originally published in January 2011. It has been updated with the latest information and edited for cohesiveness.

Tips Tax Day St. Pete-Tampa

April 6, 2013 By Chris Leave a Comment

Tips for Tax Day: St. Petersburg-Tampa – Tax Day Is Monday, April 15

If you’re among the few non-procrastinators out there in the St. Petersburg-Tampa area, you’ve already gathered up your tax documents, receipts and records, loaded them into an empty Amazon.com box, dropped them off at your accountant’s office and are now awaiting the good, or not so good news. Congratulations! You’ve effectively avoided the last minute pressure, and the feelings of guilt that comes with being an LMF, Last Minute Filer. (Remember, if your tax situation is at all complex, hiring an accountant is a very good decision.)

But for those of you LMFers out there who are still trying to recall where your receipts are, need we remind you that the last day to file your taxes without incurring a penalty is Monday, April 15, as it’s been since 1955?

April 15 is also deadline day for a couple of other items you need to tidy up:

If you maintain a traditional or Roth IRA, you must make your 2012 contributions by April 15.
If you’re among the lucky ones required to make quarterly payments, the first one due for 2013 must also be paid by April 15, 2012.

If you’re a resident of the State of Florida, congratulations, there is no state income tax so you don’t have to worry about that form. But if you need assistance here are a couple of places to go: IRS phone helpline, IRS help online, and FAQ’s.

If you’re preparing your own taxes, here are a few tips to keep in mind:

You can deduct state, local or foreign real estate taxes levied for the general public welfare, as long as they are based on the assessed value of the real property of which you are the owner.
You can deduct estimated tax payments you made during the year.
You can either take a deduction or a credit for income taxes imposed on you by a foreign country or a U.S. possession. However, there are some exceptions, so check with your tax professional or read the instructions carefully.
If you bought or sold real estate during 2012, the real [Read more…]

Confusion Dispelled on 3.8% Real Estate Tax

December 19, 2012 By Chris Leave a Comment

Confusion Dispelled On 2013 3.8% “Real Estate Tax”

Ever since the adoption of “Obamacare” in 2010, confusion, rumors and disinformation have surrounded what has been referred to as the 3.8% 2013 “real estate tax,” and by others as a “Medicare tax” scheduled to take effect January 1, 2013. Let’s see if we can dispel some of the myths and get down to facts.

3.8% Real Estate Tax, aka “Medicare Tax” Explained:

First, it’s referred by some as a “Medicare Tax” because Congress earmarked proceeds for the Medicare Trust Fund when the legislation was adopted March 23, 2010. It’s estimated that $210 billion will be raised over 10 years with a goal of helping to extend the life of the federal Medicare program.

Rumors persist that the 3.8% real estate tax will apply to all real estate sales. NOT SO, but it can be complex trying to determine if you will have a tax consequence or not. Therefore, it’s important to understand some of the terminology involved before we get down to the numbers.

Net investment income – Income received from investment assets such as bonds, stocks, mutual funds, loans and other investments.

Capital gain – When a capital asset is sold, the difference between the basis in the asset and the amount it is sold for (or a capital loss if it is sold for less).

Basis – the cost of an asset, which includes the purchase price, shopping, installation, and other services associated with the asset.

Adjusted gross income (AGI) – measure of income used to determine how much of your income is taxable and is calculated as your gross income from taxable sources minus allowable deductions, such as unreimbursed business expenses, medical expenses, alimony and deductible retirement plan contributions.

Now, here is just one example of this new tax: Capital Gain on Sale of Principal Residence

o Couple sells house for a realized gain of $600,000

o Adjusted gross income (AGI) is $300,000 (before the sale)

o Taxable gain on sale = $100,000 ($600,000 gain – $500,000 exclusion for married filing jointly on sale of principal residence)

o New AGI= $400,000 ($300,000 + $100,000)

o Excess of AGI over $250,000= $150,000 ($400,000 – $250,000 since married filing jointly)

o Lesser of the excess AGI or taxable gain on sale= $100,000

o Tax due= $3,800 ($100,000 taxable investment income x 3.8% tax)

Note: if the couple had a gain of less than $500,000 on the sale of their residence, none of that gain would be subject to the 3.8% tax. Whether they paid the 3.8% real estate tax would depend on the other components of their $300,000 AGI.

Keep in mind, if all of your income is derived from real estate investments that you own and operate, you may not be subject to the 3.8% tax. Your property may be considered your “trade or business,” and although you are not responsible for the 3.8% tax you could be responsible for a tax on the earned income.

Additionally, if you use rental properties for an investment, then they are not considered a trade or business, no matter the income you bring in. Rental homes that have been rented for more than 14 days could be subject to the new 3.8% tax, assuming that you meet the $200,000/$250,000 AGI threshold.

In the sale of a secondary home there is no tax exclusion for the first $250,000/$500,000 of a capital gain.

Bottom line – The unearned income “Medicare Tax” applies to ALL capital gains, not only home sales. Whatever your income level, or however much you profit from the sale of your investments, everyone’s income and tax situation is different. Our advice is to seek the guidance of your tax professional to see how the 3.8% may, or may not, affect you.

Chris Hounchell & Associates is the leader in general real estate, pre-foreclosure, short sale and foreclosure markets in the Pinellas County area. We are not licensed tax advisors in any capacity, so this information should not be used to make any tax related decision based on the qualification of any information received by Chris Hounchell. For more information on buying vs. renting, contact Chris today at 727-642-9107.

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