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By Maureen Moran | Broker in Chicago, IL
  • What You Should Know About Your Home and Your 2013 Taxes

    Posted Under: Financing in Chicago, How To... in Chicago, Home Ownership in Chicago  |  April 3, 2014 6:42 AM  |  184 views  |  No comments

    It’s the last year for three sweet home tax benefits, but the first for a way simpler home office deduction.

    These days few things start a fight on Capitol Hill faster than taxes. Despite the fact that three important tax benefits used by millions of American homeowners are days from expiring, Congress is unlikely to do anything to re-up them any time soon.

    So if you’re eligible, tax year 2013 is possibly the last time to claim the private mortgage insurance (PMI) deduction, the energy tax credit, and debt forgiveness benefit, all of which all expire on Dec. 31, 2013.

    At least there’s one piece of good news for homeowners: If you have a home office, there’s a new, simpler option for calculating the home office deduction for which you may qualify on your 2013 taxes.

    Meanwhile, here’s what you need to know about those expiring benefits as you ready your taxes:

    PMI Deduction

    This tax rule lets you deduct the cost of private mortgage insurance, which is what you pay your lender each month if you put down less than 20% on a home. PMI protects the lender if you default on the home loan. Your deduction could amount to a couple hundred dollars depending on your tax bracket and other factors.

    Find out if you qualify for and how to take the PMI deduction.

    Energy-Efficiency Upgrades

    This sweet little tax credit lets you offset what you owe the IRS dollar-for-dollar for up to 10% of the amount you spent on certain home energy-efficiency upgrades, from insulation to water heaters. On the downside, the credit is capped at $500 (less in some cases). But on the bright side, the right improvement could lower your utility bills indefinitely.

    Related: Take back your energy bills with these high-ROI energy-efficiency practices.

    Debt Forgiveness

    When you go through a short sale, foreclosure, or deed-in-lieu, your lender typically lets you off the hook for some or all of what you owe on your mortgage.

    That forgiven mortgage debt is income, on which you’d typically have to pay income tax.

    Suppose you’re in financial distress and your lender agrees to let you short-sell your home, say for $50,000 less than you owe on the mortgage, and forgive you for the balance. Without the protection of the Mortgage Debt Forgiveness Act, you’ll owe income tax on that $50,000.

    It’s likely if you had the money to pay income tax on $50,000, you’d have used it to pay your mortgage in the first place.

    New Simplified Option for the Home Office Deduction

    This may be the last year for the benefits above, but a new one kicks in for the 2013 tax year. If you work from home, you may qualify to use a new, simplified option for claiming the home office deduction when you file your 2013 taxes.

    How much simpler is it? It lets you claim $5 per sq. ft. for up to 300 sq. ft. instead of having to compute the actual expenses of your home office using a 43-line form. To calculate the square footage of your office, just multiply the length of two walls. For example, an 8-by-10-foot room is 80 sq. ft. And at $5 per, that’s $400.

    Although using the simplified option is obviously easier, the basic requirements for claiming the home office deduction haven’t changed. Your home office still must be used for business purposes:

    • Exclusively, and
    • On a regular basis.

    Related: Which Home Office Set-Ups Qualify for a Deduction?

    Why Might the Tax Benefits Not Be Renewed?

    Although the expiring tax benefits were renewed retroactively in past years, that may not happen in 2014 because many in Congress would like to see comprehensive tax reform rather than scattershot renewals of individual provisions. This could delay a decision on the homeownership tax benefits until the big picture budget and tax issues are resolved.

    So if you can, enjoy them now!

    Related: 9 Common Tax Mistakes to Avoid

  • Your Top Home Ownership Tax Questions Answered

    Posted Under: Financing in Chicago, How To... in Chicago, Home Ownership in Chicago  |  March 26, 2014 8:22 AM  |  182 views  |  No comments

    Which tax benefits do home owners miss? Will you get audited if you take the home office deduction? Find out the answers to these questions and more before Tax Day.

    There are a lot of home ownership tax benefits — if you don’t forget to take them. To make sure you get your due, HouseLogic asked tax expert Abe Schneier, a senior technical manager with the American Institute of CPAs, for tax-filing tips.

    HouseLogic: What’s the most common home-related tax deduction or credit claimed by home owners?

    Abe Schneier: The mortgage interest deduction, [which the NATIONAL ASSOCIATION OF REALTORS® estimates amounts to about $3,000 in tax savings for the average itemizing home owner] and [the deduction for] real property taxes.

    HL: Which tax provision do home owners often overlook?

    AS: You can deduct mortgage insurance premiums [or PMI] if you were required to get PMI as a condition of receiving financing on your home. Some people will overlook that, although it’s typically disclosed on the 1099 that you receive from the bank, along with all the deductible information you need.

    HL note: The PMI deduction has been extended through 2013 and is retroactive for 2012.

    [Another area of tax-filing confusion is] whether you’ve correctly treated any points you paid if you refinanced. In a new home purchase, the points can be deducted [in the tax year you paid them]. But typically in a refinancing, you have to amortize and deduct any points you paid over the life of the mortgage, and people tend to forget that after a couple of years.

    HL: What’s the No. 1 mistake home owners make when filing their taxes?

    AS: Because you receive a statement from the bank with details [such as] how much mortgage interest you paid over the year, and how much the bank pays on your behalf in real estate taxes, the number of mistakes has dropped.

    But if you’re in a state where you pay the real estate taxes on your own — the bank doesn’t handle it for you — [people] make mistakes because sometimes real estate tax bills include other items besides pure real estate taxes. It could be trash collection fees; it could be snow removal fees that the state or county is assessing on the real estate tax bill. Since the items are included in the same bill, home owners sometimes deduct [those fees] regardless of whether the items are actually taxes.

    HL: What’s the single most important piece of advice for people filing their taxes as a first-time home owner?

    AS: You have to take a look at your closing statement from when you bought the house. It’s commonly called the HUD-1 form and you receive it at the closing. Occasionally, there are fees such as prepaid taxes or interest at closing that can be deductible.

    HL: What tax advice do you have for someone who’s owned their home for 10 or 20 years?

    AS: If you’ve been a longtime home owner and you’ve been through refinancings, you have to be careful about how much interest you’ve deducted, especially if you have a home equity loan or equity line. A lot of people who’ve refinanced have sizable equity lines. The maximum outstanding home equity debt on which interest is deductible is $100,000; the maximum loan amount on which interest is deductible is $1 million.

    HL: What home improvement-related records should home owners keep?

    AS: Absolutely keep your receipts for couple of reasons:

    1. You want to make sure — if there are any warranties attached to the work that was done — that you maintain those records and you have something to go back to the person who did the work in case something doesn’t function properly.

    2. If you’ve added value to the home — you’ve added a deck, you’ve added a room, you’ve added something new to house — you’ll need to know what the gain is on that capital improvement when you sell the house.

    HL note: Tax rules let you add capital improvement expenses to the cost basis of your home, and a higher cost basis lowers the total profit or capital gain you’re required to pay taxes on. Of course, most home owners are exempted from taxes on the first $500,000 in profit for joint filers ($250,000 for single filers). So it doesn't apply to too many people.

    HL: How do I tell the difference between a capital improvement and a repair?

    AS: Typically a repair is [done] to allow an item, like a home furnace or air conditioner, to continue. But if you were to replace the heating unit, that’s not a repair.

    HL: Does taking any home-related tax benefits, such as the home office deduction, make a taxpayer more likely to be audited?

    AS: Only if numbers look out of the ordinary — for instance, if one year you were writing off $20,000 in mortgage interest debt and the next year you’re writing off $100,000 in mortgage interest. Taking the home office deduction in and of itself doesn’t usually generate an audit. However, if you claim nominal income and significantly higher expenses in an effort to create artificial losses, the IRS will see that there’s something else going on there.

    HL: Once filing season is over, when should home owners start thinking about next year's taxes?

    AS: Well, hopefully, when you visit your CPA to give information about or pick up [this year's] tax return, your CPA has spoken with you about your plans for [next year]:

    • If any major improvements are scheduled
    • If you’re planning on moving
    • How to organize any expenditures for fixing up the home before sale

    If you’re planning to do any of those things, talk with your CPA so that you’re prepared with documentation and so that the [tax pro] can help minimize your tax situation.

  • How to Deduct Your Upfront Mortgage Insurance Premiums

    Posted Under: Financing in Chicago, How To... in Chicago, Home Ownership in Chicago  |  March 19, 2014 8:24 AM  |  180 views  |  No comments

    If you paid a really big upfront mortgage insurance premium at the closing table (we’re talking thousands of dollars), you may be able to recoup some of that cost by deducting your payments on your federal income tax return.

    How do you know if you paid upfront mortgage insurance premium? Check the HUD-1 settlement statement you got at closing — the one-page sheet showing what you paid and what the home seller paid when you got your mortgage. If you have:

    • A Veterans Administration or USDA’s Rural Housing-guaranteed loan, the upfront fee will be labeled “funding fee” or “guarantee fee.”
    • An FHA loan, it’ll be listed as “upfront fee.”
    • Private mortgage insurance, an upfront fee is a “single premium,” and it’s likely labeled MIP (mortgage insurance premium).

    If you didn’t pay an upfront fee, you likely got a monthly payment policy.

    The purpose of any type of mortgage insurance is the same: To protect the lender in case you default on the loan.

    The upside is that it’s a good deal for aspiring home owners. Many people, especially first-time buyers, can’t come up with big down payments. Mortgage insurance encourages lenders to give home loans to those who have the means to pay a mortgage, but lack the hefty down payment.

    Not Everyone Qualifies for the Deduction

    If your adjusted gross income (AGI) is no more than $100,000 ($50,000 for married filing separately), and you took out the loan in 2007 or later, then you can take the mortgage insurance deduction as one of your itemized deductions on Schedule A. The mortgage must be for your primary residence or a second home that’s not a rental property.

    If your AGI is higher than $109,000 for couples ($54,500 for married filing separately), sorry, you’re out of luck. No deduction for you.

    If your income falls between $100,000 and $109,000, your deduction is phased out. Use the worksheet that comes with Schedule A to see how much you can deduct.

    Got a VA or Rural Housing Loan? Lucky You!

    If your loan was made through the VA or the USDA’s Rural Housing loan program, your upfront payment is completely deductible in the year you pay it.

    Put the amount listed on your HUD-1 for guarantee or funding fee right onto your Schedule A.

    Deducting Your FHA Upfront and Single Premium Payments

    If you have an FHA loan or you bought a single-premium private mortgage insurance policy, you have to do a little math to figure out how much you can deduct.

    Start with the amount you paid (or financed into your loan) and divide by whichever time frame is shorter: 84 months (that’s 7 years) or the total number of months of your loan’s life. (We could go into great detail why this formula was chosen, but we figure you probably don’t care. You just want to know how to do it, right?)

    Since pretty much everyone has a mortgage term longer than 7 years, you’ll probably use the 84 months.

    Here’s an example: Let’s say you bought a house last January and paid $8,400 upfront for mortgage insurance.

    $8,400 ÷ 84 = $100

    Multiply $100 by the number of monthly mortgage payments you made during the year (for example, 12 if you closed in January, or six if you closed in July).

    $100 X 12 = $1,200 or $100 x 6 = $600

    Assuming 12 payments, your deduction is $1,200.

    Enter that figure on line 13 of Schedule A.

    Note: Don’t confuse upfront mortgage insurance premiums with pre-paying your monthly mortgage insurance premiums. If you paid your January 2013 premium in December 2012, that’s a pre-payment. Paying upfront means you paid a whopping premium at closing.

    Find out what other tax deductions you might be entitled to in our Homeowner’s Guide to Taxes.

  • Deduction Options When You Work From Home

    Posted Under: Financing in Chicago, How To... in Chicago, Home Ownership in Chicago  |  March 12, 2014 2:45 PM  |  199 views  |  No comments

    Like things easy? The new simplified home office deduction may be your salvation from the long form. But you might not save as much the easy way.

    Now, there’s an optional, simplified home office deduction: Take $5/sq. ft. up to 300 feet or $1,500 and, boom, you’re done.

    What’s the catch? Trade-off is a better word: You may not be able to deduct as much compared with the regular method. The IRS says the average home office deduction has been around $3,000. So consider the value of your time against potential tax savings if you believe you’re eligible for more than the $1,500 cap.

    Before you start spending your refund, however, there are a few rules you need to heed.

    What Counts as a Home Office?

    A room or defined area of your home that you use exclusively and on a regular basis for business and that meets either of these uses:

    • It’s your principal place of business, or
    • You see clients, customers, or patients there.

    Exception to the “exclusive” rule: If you use your home as the sole location of your business and store products there, the room or area where you store products can be used for other things. Say you use a room in your basement to make and store jewelry that’s also a TV room. If it’s the only fixed location of your business, you can use it to also watch TV.

    What If You’re on the Road a Lot?

    You don’t have to do all your work from home to take the home office deduction. If you’re an outside salesperson, you probably spend most of your work time elsewhere. But the home office has to be essential to your business, and you must spend substantial time there.  If you do your billing and other office work from your home office, and there’s no other location available to perform these functions, your home office should qualify for the deduction.

    You can also qualify for the deduction if your employer requires you to work from home, as long as you don’t charge your employer rent.

    A big catch: You must maintain the at-home office for your employer’s convenience, not your own. If you use your home office to finish reports at night or on weekends because you don’t want to work at your desk in your office downtown, you can’t claim the home office deduction.

    But if your employer doesn’t have a headquarters and everyone works remotely, you’re good to go.

    Also Covered Under the Tax Break

    Separate structures on your property, like a detached garage you’ve converted to an office or studio.

    Unlike an office inside your home, a separate structure doesn’t have to be your main place of business to qualify for a deduction. That’s because the IRS believes your family is less likely to use a separate structure as a part-time play area or den, says Mark Luscombe, principal analyst for tax and consulting at CCH. 

    Related: Check Zoning Laws Before Adding a Detached Workshop or Studio

    Two Ways to Deduct Home Office Expenses

    1. Simplified home office deduction. We talked about this one above, but there are a few other particulars to note:

    • You can’t depreciate your home office, and your deduction is limited to your gross business income less business expenses.
    • If you use this deduction, you can still claim the deductions every homeowner gets, like mortgage interest, real estate taxes, and casualty losses. Put those on Schedule A.
    • Using the standard home office deduction won’t stop you from taking the deductions for other business expenses unrelated to your home, such as advertising, supplies, and employee wages.
    • You don’t need to keep track of individual expenses with this option. You do with the actual cost method.

    2. Actual costs, which you list on Form 8829. To use this method, you figure the proportion of your home’s overall space devoted to your office and use that to calculate how much of your overall home expenses went toward your home office.

    Example: If your office is 300 sq. ft. and your home is 3,000 sq. ft., your office takes up 10% of your home. So you can deduct 10% of your utility, mortgage interest, property taxes, and other home expenses. However, certain expenses that aren’t related directly to the home office, such as lawn care, aren’t included in the calculation.

    Not sure how big your house is? Check the documents you received when you bought your home — there’s probably a detailed rendering — or measure the outside of your home and multiply length times width.

    Do You Have to Stick with the Same Deduction Method Each Year?

    Nope. Each year, you get to decide whether to use the standard or the actual-expense deduction.

    What Can You Deduct When You Use the Long Form?

    If you’re using Form 8829 to report your actual expenses and you’ve figured out what percentage of your home you use for business, you can apply that percentage to different home expenses. These include:

    • Mortgage interest
    • Real estate taxes
    • Utilities (heating, cooling, lights)
    • Home repairs and maintenance (so long as they benefit both the business and personal parts of the home)
    • Homeowners insurance premiums

    Just take each expense and multiply it by your home office percentage to get the amount you can deduct as a business expense. So if you spend $150 a month on electricity, and your home office takes up 10% of your home, you can deduct $15 a month as a home office expense. That adds up to a $180 deduction per tax year.

    Important limitation: Your home office deduction can’t exceed the amount of income you generate from the home office. So if you spend some of your work time on-site with a client and earn $1,500 there, you can’t claim more than $1,500 because it exceeds what you made at home.

    Save bills or cancelled checks to prove what you spent in case of an IRS audit. Also, only repairs, like to the furnace, can be expensed; improvements must be depreciated.

    Don’t Forget Depreciation

    Depreciation is based on the idea that everything — even something like a home — wears out eventually. If you’re using the long form, figure home office depreciation by calculating the tax basis of your home:

    1.  Add the purchase price to the cost of improvements.

    2.  Subtract the value of the land it sits on.

    3.  Multiply that cost basis by the percentage of your home used for work. This gives you the tax basis for your home office.

    4.  Divide by 39 years.

    For example:

    • Purchase price: $100,000
    • Value of land: $25,000
    • Cost basis: $75,000, plus cost of improvements you’ve made
    • Tax basis: $75,000 x 10% = $7,500
    • Depreciation deduction: $7,500/39 years*

    *Usually, depreciation deductions for a home office are figured over a 39-year period. There are caveats. For instance, if your business opened after Jan. 1 in its first year, you need to calculate a factor of 39. For a crash course, read IRS Publication 946 or talk to a tax pro.

    Keep in mind that depreciation deductions on your home office may increase the amount of profit on a home sale that’s subject to taxes. Most taxpayers don’t owe income tax on up to $250,000 of profit if you’re a single filer, $500,000 for joint filers. Consult with a qualified tax professional on how depreciation deductions affect your tax liability when you sell.

    Related: More on How Improvements Can Lower Your Cost Basis

    Special Rules for In-Home Care Providers

    If you provide in-home daycare services for children, the elderly, or disabled persons as a licensed or authorized business, you don’t have to use the home work space exclusively to take the home office deduction.

    You calculate your deduction by dividing the number of hours you used your home workspace to provide daycare services during the year by the total number of hours during the year.

    For example, if you do daycare 40 hours a week for 50 weeks a year, that’s 2,000 hours a year, divided by the 8,760 hours in a regular year equals 22.8%. So you could take 22.8% of the $5 per sq. ft. simplified deduction for your daycare workspace.

    Related: What You Should Know About Your Home and 2013 Taxes

    This article provides general information about tax laws and consequences, but shouldn’t be relied upon as tax or legal advice applicable to particular transactions or circumstances. Consult a tax professional for such advice.

  • Proper Pricing is Key!

    Posted Under: Home Buying in Chicago, Home Selling in Chicago, Financing in Chicago  |  September 4, 2013 4:13 PM  |  757 views  |  No comments

    Median sales across Chicago's north side are trending toward a steady pace of appreciation, measured growth. Inventory is still well below normal level with less than 4 months supply in most areas, well priced and well cared for properties are not on the open market long. There are still some distressed properties on the market, but they are selling much closer to market value. Discounts for distressed properties are no longer the norm. 

    Buyers area are very conservative in this recovering market - keeping a close eye on mortgage rates as they consider a homes affordability. 

    Interest rates are expected to bounce up and down, with a tick up toward the end of the year. As interest rates go up, home sellers will need to consider that their buyer pool could shrink as interest rates increase.

    Proper pricing is key to a successful sale!

  • How to Get Your PMI Deduction

    Posted Under: Home Buying in Chicago, Financing in Chicago, Home Insurance in Chicago  |  March 13, 2013 3:47 PM  |  594 views  |  No comments

    Deducting PMI premiums can save you hundreds of dollars. Here’s what you need to know to get the deduction.

    Do You Qualify for the Deduction?

    Just because you have PMI premiums doesn’t mean you can deduct them. Here’s what qualifies you:

    • You got your loan in 2007 or later.
    • Your mortgage is for your primary residence or a second home that’s not a rental property.
    • Your adjusted gross income is no more than $109,000. The deduction begins to phase out once your adjusted gross income (AGI) exceeds $100,000 ($50,000 for married filing separately) and disappears entirely at an AGI of more than $109,000 ($54,500 for married filing separately).

    How to File for the PMI Deduction

    You’ll have to itemize and use Schedule A.

    If you make no more than $100,000 a year, put the amount of insurance premiums you paid last year on Line 13. Don’t include pre-paid premiums for this year. You’re doing taxes based on last year’s income and expenses, so this year’s premiums don’t count even if you pre-paid them last year. (More about deducting prepaid and upfront mortgage insurance here.)

    If your adjusted gross income is between $100,000 and $109,000, use the worksheet included with Schedule A to figure out how much you get to deduct.

    How Much Can You Save?

    It depends on how much you’re paying. A good rule of thumb industry experts use: You'll pay $50 a month in premiums for every $100,000 of financing. Keep in mind, though, that the amount of the down payment, type of loan, and lender requirements can all affect your actual cost.

    For example, if you put 5% down on a $200,000 house, you’ll pay monthly PMI premiums of about $125. Increase your down payment to 10%, and you’ll pay less than $80 a month.

    So how does this affect your tax bill? Let’s say your adjusted gross income is $100,000. You bought a $200,000 house in 2012, put down 5%, and paid $1,500 in PMI premiums ($125 times 12 months). The deduction for PMI cuts your taxable income by $1,500. If you’re in the 15% tax bracket, you save $225 on your tax bill ($1,500 x 15%), and if you are in the 25% tax bracket, you save $375 ($1,500 x 25%).

    The Best Savings of All: Canceling Your PMI

    Although the tax deduction is nice — at least while it lasts — getting rid of PMI altogether is even nicer.

    You can cancel your PMI when you have 20% equity in your home. Lenders are required to automatically cancel it once you have 22% equity. If you think you’re at that threshold, find out more about canceling your PMI.

    Get more tax tips with our complete Home Owner’s Guide to Taxes.

    This article provides general information about tax laws and consequences, but shouldn’t be relied on as tax or legal advice applicable to particular transactions or circumstances. Consult a tax pro for such advice; tax laws may vary by jurisdiction.

  • 4 Tips to Determine How Much Mortgage You Can Afford

    Posted Under: Home Buying in Chicago, Financing in Chicago, Rent vs Buy in Chicago  |  February 27, 2013 5:47 AM  |  612 views  |  No comments

    By knowing how much mortgage you can handle, you can ensure that home ownership will fit in your budget.

    1. The general rule of mortgage affordability

    As a rule of thumb, you can typically afford a home priced two to three times your gross income. If you earn $100,000, you can typically afford a home between $200,000 and $300,000.

    To understand how that rule applies to your particular financial situation, prepare a family budget and list all the costs of homeownership, like property taxes, insurance, maintenance, utilities, and community association fees, if applicable, as well as costs specific to your family, such as day care costs.

    2. Factor in your downpayment

    How much money do you have for a downpayment? The higher your downpayment, the lower your monthly payments will be. If you put down at least 20% of the home's cost, you may not have to get private mortgage insurance, which costs hundreds each month. That leaves more money for your mortgage payment.

    The lower your downpayment, the higher the loan amount you’ll need to qualify for and the higher your monthly mortgage payment.

    3. Consider your overall debt

    Lenders generally follow the 28/41 rule. Your monthly mortgage payments covering your home loan principal, interest, taxes, and insurance shouldn’t total more than 28% of your gross annual income. Your overall monthly payments for your mortgage plus all your other bills, like car loans, utilities, and credit cards, shouldn’t exceed 41% of your gross annual income.

    Here’s how that works. If your gross annual income is $100,000, multiply by 28% and then divide by 12 months to arrive at a monthly mortgage payment of $2,333 or less. Next, check the total of all your monthly bills including your potential mortgage and make sure they don’t top 41%, or $3,416 in our example.

    4. Use your rent as a mortgage guide

    The tax benefits of homeownership generally allow you to afford a mortgage payment—including taxes and insurance—of about one-third more than your current rent payment without changing your lifestyle. So you can multiply your current rent by 1.33 to arrive at a rough estimate of a mortgage payment.

    Here’s an example. If you currently pay $1,500 per month in rent, you should be able to comfortably afford a $2,000 monthly mortgage payment after factoring in the tax benefits of homeownership.

    However, if you’re struggling to keep up with your rent, consider what amount would be comfortable and use that for the calcuation instead.

    Also consider whether or not you’ll itemize your deductions. If you take the standard deduction, you can’t also deduct mortgage interest payments. Talking to a tax adviser, or using a tax software program to do a “what if” tax return, can help you see your tax situation more clearly.

    More from HouseLogic

    More on the mortgage interest deduction

    More on the tax advantages of homeownership

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