Home Buyer's Guide Homeownership & Your Taxes Preparing to Buy Tax Return Copies Credit Report Shopping for a Mortgage Documenting Your Home Purchase Refinancing Selling a Home Helpful Information Tax Deductible Moving Expenses Record Keeping for Your Home Home Buying Terms Homeownership & Your Taxes Homeownership is a dream of many Americans. Interest rates may fluctuate, and economic circumstances may change, but owning a home remains an attainable goal. Americans have enjoyed an era of low interest rates and these, coupled with the economic stimulus package for new home buyers, make homeownership affordable for many. Homeowners deduct their mortgage interest if they itemize their deductions. Itemizing is generally more beneficial than taking the standard deduction. Preparing to Buy The process of buying a home can be overwhelming. The first step is to get organized, gather appropriate records and documents, and determine how much house you can afford. How much money will you have for a down payment? What amount can you afford to pay each month for the mortgage and home expenditures? Gather your past three years’ tax returns, your credit report, and other documents and you’re ready to start the pre-qualification process for a mortgage loan. Your loan officer will probably ask for two or three years of W-2 forms and current pay stubs, a two-year employment history, landlord references for two years, bank statements and credit card balances. Find out what information the loan officer needs before you go to your mortgage interview. Be familiar with the various types of mortgages. Comparison shop your local mortgage companies. There are conventional and adjusted rate mortgages (ARMs), as well as foreclosed homes. With the many options available, educated customers can apply their research to make their best deal. It’s wise to consult an experienced real estate agent for advice on the local market and various types of financing. Tax Return Copies If you need copies of past years’ tax returns, you can request them from your tax preparer or from the Internal Revenue Service (IRS). You can get these documents from the IRS by filing Form 4506, Request for Copy of Tax Return, with a $57 fee for each return requested or Form 4506-T, Request for Transcript of Tax Return, for no charge. Call Liberty Tax Service, IRS Customer Service, or visit the IRS website for either form. Credit Report Your credit score plays a vital role when it comes to purchasing a home and the interest rate that a lender will offer you. Check your credit reports before you start mortgage shopping, so that you’ll have time to correct any wrong information that you may find. You can order your credit report for a minimal charge from the main credit bureaus – Equifax, Experian, or TransUnion. Certain websites, such as annualcreditreport.com, allow you to obtain a free copy of your credit report every 12 months from each of these companies. Shopping for a Mortgage Shopping around for a mortgage will help you get the best possible financing. Comparing the cost from several lenders could save you time – and more importantly money. Establishing a relationship early on with a mortgage lender is a smart step in finding your dream home. You can get approved for a loan quicker, put in a serious offer, and possibly purchase that dream home before anyone else bids. When you interview with mortgage lenders, there is documentation that you will need, including: Past three years’ tax returns with W-2 forms or payroll stubs Past years’ profit-and-loss statements if you’re self-employed Social Security cards Driver’s licenses Checking and savings account statements with name of financial institution IRA and retirement account statements Credit card statements Mutual fund and stock statements Documentation of current debts Serial numbers and documentation of any U.S. Savings Bonds Gift letters for down payment money received as a gift Divorce decree and property settlements Military ID or discharge papers Any current mortgage company statements Closing statement on current residence Documentation of timely child support payments (received or paid) Any bankruptcy petition Car loan information Documenting Your Home Purchase When is the best time to buy a home? For tax purposes, the earlier in the year the better. If you close on your home during January rather than June, you have the advantage of deducting more months of mortgage interest that first year. Real estate taxes that are paid on your home are also deductible for the tax year. Your mortgage company will issue Form 1098, Mortgage Interest Statement, to list the tax-deductible mortgage interest and may also list real estate taxes paid for the year. This statement is mailed by January 31. Keep all tax information in a safe place so that you’ll have it when you file. In most cases, homeowners are allowed to deduct all home mortgage interest paid on a loan made to secure a main home or second home. The mortgage must be a secured debt financed by a mortgage or deed of trust on that property. The taxpayer must be legally liable for the loan, and file Form 1040, U.S. Individual Income Tax Return, along with Schedule A, Itemized Deductions. Besides the mortgage interest, certain closing costs may be deductible, such as “points” paid by both the buyer and seller. Points are considered prepaid interest and are sometimes called loan origination fees. Generally, points are deductible over the term of the loan, but home buyers can deduct them in the purchase year if all of the following conditions are met: Taxpayer is legally responsible for the loan. Paying “points” is an established business practice in the area. Points paid are not more than are generally charged in the area. Taxpayer uses the cash method of accounting. Points were not paid for items such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes. Taxpayer provided funds at closing that were more than the amount of points paid. Loan is used to purchase or build main home. Points were figured as a percentage of the principal amount of mortgage. The amount is clearly shown on the settlement statement as points. At your closing, you’ll sign a settlement statement created by the U.S. Department of Housing and Urban Development called a Form HUD-1 Settlement Statement (see examples pages 5-7). The Form HUD-1 Settlement Statement shows a detail of monies transferred and paid to complete the real estate property transfer. It is an important document that needs to be kept for tax purposes. The Form HUD-1 Settlement Statement has two columns: the left side is for the buyer, while the right is for the seller. Some items that pertain to your tax return in the year the home is purchased are listed on page 2 of the document: item (801) Loan Origination Fee; item (802) Loan Discount or Point(s) paid to secure the mortgage loan on the property, and item (901) Prepaid Interest. Refinancing The current interest rates have encouraged many homeowners to refinance their home mortgages for a lower payment. Homeowners who refinance their homes this year, and pay “points,” must deduct them over the life of the loan, NOT all in the year of the refinance. If the homeowner used part of the proceeds to improve a main residence, he or she may be able to deduct them in the year paid. Fees charged for specific services, such as preparation costs for a mortgage note, appraisal fees or notary fees, are not interest and cannot be deducted. Points paid by the seller of a home cannot be deducted as interest on the seller’s return, but can be claimed as a selling expense which will reduce the amount of gain realized. Selling a Home A home seller who is a single taxpayer may qualify to exclude, from their income, the first $250,000 of profit from the sale of a home he/she has owned and lived in for two of the last five years. The two years of ownership and occupancy do not have to be consecutive years. A married couple may qualify to exclude the first $500,000 of profit from income. Helpful Information Aside from our website, the Internet is a wonderful resource for valuable home information. Many realtor websites have online listings that allow “virtual tours” of properties for sale. Realtor.com offers tips about finding a realtor, lender, neighborhood, and school district. There’s also a buyer’s guide with 10 steps to homeownership, moving information, mortgage options, and even a relocation wizard to establish a timeline for moving. In addition, the IRS website has tax publications for home buyers and owners, including Publication 521 Moving Expenses, Publication 523 Selling Your Home, Publication 529 Miscellaneous Deductions, Publication 530 Tax Information for Homeowners, and Publication 936 Home Mortgage Interest Deduction. As a home buyer or seller, you may need the following forms, found on the IRS website, to prepare your taxes: Form 1040 U.S. Individual Income Tax ReturnSchedule D Capital Gains and LossesForm 8822 Change of AddressSchedule A Itemized DeductionsForm 3903 Moving ExpensesForm 8396 Mortgage Interest Credit Tax Deductible Moving Expenses If you purchase a home and meet distance and time tests relative to the location of your old home and your new job, you may deduct certain moving expenses on your tax return. The costs of renting a moving van, hiring movers, and the cost of gas or the standard mileage rate are examples of moving expenses that may be taken as an adjustment to income. If you are an employee, you must work full-time in the general area of your new workplace for at least 39 weeks during the 12 months right after you move. If you are self-employed, you must work full-time in the general area of your new workplace for at least 39 weeks during the first 12 months and a total of at least 78 weeks during the 24 months right after you move. Moving expenses paid by an employer may not be deductible. Keep the IRS informed of your most recent address by using the IRS change of address acknowledgment, Form 8822, Change of Address. Record Keeping for Your Home What documents should you save regarding your home? It’s very important to keep the Form HUD-1 Settlement Statement from the closing, real estate tax records, mortgage statements, tax returns from the year of the home purchase and any years you claimed expenses for a home office, and the costs of improvements made to your home. When this primary residence is sold at a later date, the homeowner will need these documents to figure the adjusted basis of the home for tax purposes. The basis of the property is generally the cost of the home at the date of the purchase and includes certain closing costs and improvements. Taxes owed by the seller and paid by the new owner add to the basis. Settlement fees, such as charges for utility installation, title fees, legal fees, recording fees, surveys, transfer fees, and title insurance, add to the basis. If the house is new, the basis includes the cost of land, home construction, labor and materials, contractor’s fees, and building and legal fees. From this original dollar figure for the basis, certain improvements and expenditures to the home may increase or decrease the original basis. This adjusted amount is referred to as the adjusted basis. Improvement costs for the home add to the basis, but repairs do not. An improvement would be considered additions that add to the value of your home, such as replacing your roof, installing central air/heat or new windows, and any electrical rewiring. A repair concerns the routine upkeep of your home, such as fixing a roof leak, replacing a floor, or painting. Repairs that are part of extensive remodeling may be considered as an improvement. Certain expenditures may decrease the original home basis. One example is casualty losses taken on a tax return for home damages. If the taxpayer claims an office in the home, or if the house has been rented, the depreciation deduction also decreases the basis. Home Buying Terms escrow – functions as an account to pay taxes and insurance. The homeowner pays into the account that is held by the lender. Fair Market Value (FMV) – normal selling price of a home in the open market that is agreed upon by the buyer and seller. A Realtor can prepare a comparative market analysis of similar properties that are currently on the market, or have sold recently in the area to determine a fair market value. Form HUD-1 Settlement Statement – the official statement of the U. S. Department of Housing and Urban Development that details all closing costs paid by the buyer and seller. This is completed by the settlement agent and both the buyer and seller must sign it at closing. improvements – home expenditures that prolong the life of your home, such as the cost of total roof replacement. points – charges at closing by lender in increments of one percent of the loan amount. They may also be listed as loan origination fees or loan discounts. These may be deductible on the tax return. repairs – expenditures that maintain a home, such as painting the interior. Refer to our Tax Glossary for a complete list of definitions and explanations of commonly used tax terms.