Housewarming tax tipsElisa BlackRent vs. Own
The information in this article is solely advisory and
should not be substituted for legal, financial or tax advice. Any
and all financial decisions and actions must be done through the
advice and counsel of a qualified attorney, tax advisor or
CPA.
Many mortgage brokers give their home loan customers
housewarming gifts, such as candles, clocks, barbecues and gift
certificates. Why not present your home loan customers with a few
tax tips, as well?
The moment a homebuyer becomes a homeowner, he starts receiving
tax benefits. Most potential homebuyers can understand this simple
example. Note that this example assumes that both seller and buyer
file federal taxes using Schedule A for deductions.
Rent
$32,000 gross income
-$12,000 yearly rent
+$0 tax benefit
----------------------------------
$20,000 disposable income
Own
$32,000 gross income
-$12,000 yearly mortgage payments
+$3,000 tax benefit
----------------------------------
$23,000 disposable income
The following tips were gleaned from the first chapter of "JK
Lasser's Homeowner's Tax Breaks 2006" by Gerald J. Robinson. This
book is an excellent source of information for homeowners.
Tip #1: Suggest to your home loan customers that they
fill out new W4s right away.
By submitting a new W4 form at work, a homebuyer can declare his
new status as a homeowner and start receiving the tax benefits
right away. Have you heard the old saying, "Who is an April fool?"
An April fool is someone who lets Uncle Sam save his money all
year, only to get it back in April without any interest. Once a
homebuyer has filled out a new W4 form, his employer can start
withholding the correct federal income tax from his pay. He will be
receiving additional money in his paycheck each month.
Tip #2: Mortgage interest is
tax-deductible.
Homebuyers' mortgage interest is tax-deductible, whereas money
spent on rent is considered a personal expenditure and is not. This
is one more financial benefit of owning over renting.
Tip #3: Homebuyers may claim their portion of real
estate taxes in the first year as a deduction.
A few wise words from you can help homebuyers secure a tax
deduction and avoid unwittingly paying the seller's portion--a
mistake that is frequently and easily done. In the first year of
homeownership, the real estate taxes are split between the seller
and the homeowner. The seller is responsible for the real estate
taxes that year, up until the day before the sale. The buyer then
becomes responsible for the rest of that real estate tax year. The
buyer can claim a deduction on those taxes.
It is very important that the real estate taxes apportioned to
buyer and seller be clearly stated on the contract of sale.
Otherwise, the buyer can get stuck paying all of the real estate
taxes for that year. Additionally, even if the buyer ends up paying
all of the real estate taxes, the seller can still claim a
deduction on the real estate taxes incurred while they were in
possession of the house. It is a simple matter for the buyer to
remind the closing agent to appropriately prorate the real estate
taxes for the year between the buyer and the seller.
Tip #4: A portion of the mortgage points may be
deductible, as well.
Mortgage points that are charged for interest are tax-deductible.
Mortgage points charged for services are not. Help your client
distinguish between the two, if necessary, by clarifying the
purpose of the points on the contract.
Even if the points are for interest, they still must meet five
qualifications in order to be tax-deductible:
• They must be designated on the Uniform Settlement
Statement (e.g., as "loan origination fees," "loan discount" or
"discount points").
• They must be a percentage of the principal amount of the
loan.
• They must be an established business practice, and the
amount must be standard for the area in which the homebuyer is
purchasing.
• They must be on your principal residence. Points on a
secondary residence are not eligible for a tax deduction.
• They must be paid directly by the buyer from separate
funds. They may not be part of the mortgage.
Remember, making your clients aware of the potential tax
benefits shows them that you have their best interests at heart.
When clients feel well cared for as individuals and not just as
numbers, they will return in the future and prove a valuable source
of referrals, as well.
Elisa Black is director of marketing and communications for
the Esther Foundation, a Utah-based non-profit organization that
works to strengthen communities by helping people to become
homeowners. She can be reached at (866) 743-7795 or e-mail
[email protected].
