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FHA on the rebound!

National Mortgage Professional
May 31, 2006

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]
May 31, 2006
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