Get an “A” on your Schedule A Form: Dodge these tax deduction pitfalls to save time, money, and an IRS investigation.
Trap #1: Line 6 - real estate taxes
Your monthly mortgage payment often includes money for a tax escrow, from which the lender pays your local real estate taxes.
The money you send the bank may be more than what the bank pays for your taxes, says Julian Block, a tax attorney and author of Julian Block’s Home Seller’s Guide to Tax Savings. That will lead you to putting the wrong number on Schedule A.
Example:
Your monthly payment to the lender: $2,000 for mortgage + $500 escrow for taxes
Your annual property tax bill: $5,500
Now do the math:
Your bank received $6,000 for real estate taxes, but only paid $5,500. It may keep the extra $500 to apply to the next tax bill or refund it to you at some point, but meanwhile, you’re making a mistake if you enter $6,000 on Schedule A.
Instead, take the number from Form 1098—which your bank sends you each year—that shows the actual taxes paid.
Trap #2: Line 6 - tax calculations for recent buyers and sellers
If you bought or sold a home in the middle of 2010, figuring out what to put on line 6 of your Schedule A Form is tricky.
Don’t simply enter the number from your property tax bill on line 6 as you would if you owned the house the whole year. If you bought or sold a house in midyear, you should instead use the property tax amount listed on your HUD-1 closing statement, says Phil Marti, a retired IRS official.
Here’s why: Generally, depending on the local tax cycle, either the seller gives the buyer money to pay the taxes when they come due or, if the seller has already paid taxes, the buyer reimburses the seller at closing. Those taxes are deductible that year, but won’t be reflected on your property tax bill.
Trap #3: Line 10 - properly deducting points
You can deduct points paid on a refinance, but not all at once, says David Sands, a CPA with Buchbinder Tunick & Co LLP. Rather, you deduct them over the life of your loan. So if you paid $1,000 in points for a 10-year refinance, you’re entitled to deduct only $100 per year on your Schedule A Form.
Trap #4: Line 10 - HELOC limits
If you took out a home equity line of credit (HELOC), you can generally deduct the interest on it only up to $100,000 of debt each year, says Matthew Lender, a CPA with EisnerLubin LLP.
For example, if you have a HELOC for $200,000, the bank will send you Form 1098 for interest paid on $200,000. But you can deduct only the interest paid on $100,000. If you just pull the number off Form 1098, you’ll deduct more than you’re entitled to.
Trap #5: line 13 - Private mortgage insurance
You can deduct PMI on your Schedule A Form, as long as you started paying the insurance after Dec. 31, 2006. (Also, this is also a good time to review your PMI: You might be able to cancel your PMI altogether because you’ve had a change in loan-to-value status.)
Trap #6: line 20 - casualty and theft losses
You can deduct part or all of losses caused by theft, vandalism, fire, or similar causes, as well as corrosive drywall, but the process isn’t always obvious or simple:
Only deduct losses that are greater than 10% of your adjusted gross income (line 38 of Form 1040).
Fill out Form 4684, which involves complex calculations for the cost basis and fair market value. This form gives you the number you need for line 20.
Bottom line on line 20: If you’ve got extensive losses, it’s best to consult a tax pro. “I wouldn’t do it myself, and I’ve been dealing with taxes for 40 years,” says former IRS official Marti.
Barbara Eisner Bayer has written about personal finance for the past 17 years. She works hard to translate IRSese into plain English. She has unbounded respect for CPAs.
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Thursday, February 17, 2011
Dos and Don'ts of Homebuyer Incentives
Homebuyer incentives can be smart marketing or a waste of money. Find out when and how to use them.
When you’re selling your home, the idea of adding a sweetener to the transaction—whether it’s a decorating allowance, a home warranty, or a big-screen TV—can be a smart use of marketing funds. To ensure it’s not a big waste, follow these dos and don’ts:
Do use homebuyer incentives to set your home apart from close competition. If all the sale properties in your neighborhood have the same patio, furnishing yours with a luxury patio set and stainless steel BBQ that stay with the buyers will make your home stand out.
Do compensate for flaws with a homebuyer incentive. If your kitchen sports outdated floral wallpaper, a $3,000 decorating allowance may help buyers cope. If your furnace is aging, a home warranty may remove the buyers’ concern that they’ll have to pay thousands of dollars to replace it right after the closing.
Don’t assume homebuyer incentives are legal. Your state may ban homebuyer incentives, or its laws may be maddeningly confusing about when the practice is legal and not. Check with your real estate agent and attorney before you offer a homebuyer incentive.
Don’t think buyers won’t see the motivation behind a homebuyer incentive. Offering a homebuyer incentive may make you seem desperate. That may lead suspicious buyers to wonder what hidden flaws exist in your home that would force you to throw a freebie at them to get it sold. It could also lead buyers to factor in your apparent anxiety and make a lowball offer.
Don’t use a homebuyer incentive to mask a too-high price. A buyer may think your expensive homebuyer incentive—like a high-end TV or a luxury car—is a gimmick to avoid lowering your sale price. Many top real estate agents will tell you to list your home at a more competitive price instead of offering a homebuyer incentive. A property that’s priced a hair below its true value will attract not only buyers but also buyers’ agents, who’ll be giddy to show their clients a home that’s a good value and will sell quickly.
If you’re convinced a homebuyer incentive will do the trick, choose one that adds value or neutralizes a flaw in your home. Addressing buyers’ concerns about your home will always be more effective than offering buyers an expensive toy.
When you’re selling your home, the idea of adding a sweetener to the transaction—whether it’s a decorating allowance, a home warranty, or a big-screen TV—can be a smart use of marketing funds. To ensure it’s not a big waste, follow these dos and don’ts:
Do use homebuyer incentives to set your home apart from close competition. If all the sale properties in your neighborhood have the same patio, furnishing yours with a luxury patio set and stainless steel BBQ that stay with the buyers will make your home stand out.
Do compensate for flaws with a homebuyer incentive. If your kitchen sports outdated floral wallpaper, a $3,000 decorating allowance may help buyers cope. If your furnace is aging, a home warranty may remove the buyers’ concern that they’ll have to pay thousands of dollars to replace it right after the closing.
Don’t assume homebuyer incentives are legal. Your state may ban homebuyer incentives, or its laws may be maddeningly confusing about when the practice is legal and not. Check with your real estate agent and attorney before you offer a homebuyer incentive.
Don’t think buyers won’t see the motivation behind a homebuyer incentive. Offering a homebuyer incentive may make you seem desperate. That may lead suspicious buyers to wonder what hidden flaws exist in your home that would force you to throw a freebie at them to get it sold. It could also lead buyers to factor in your apparent anxiety and make a lowball offer.
Don’t use a homebuyer incentive to mask a too-high price. A buyer may think your expensive homebuyer incentive—like a high-end TV or a luxury car—is a gimmick to avoid lowering your sale price. Many top real estate agents will tell you to list your home at a more competitive price instead of offering a homebuyer incentive. A property that’s priced a hair below its true value will attract not only buyers but also buyers’ agents, who’ll be giddy to show their clients a home that’s a good value and will sell quickly.
If you’re convinced a homebuyer incentive will do the trick, choose one that adds value or neutralizes a flaw in your home. Addressing buyers’ concerns about your home will always be more effective than offering buyers an expensive toy.
Tuesday, February 15, 2011
Second wave of housing bust hammers more cities
A second wave of falling home prices is battering some cities that had escaped the worst of the housing market bust.
Prices in Seattle, Charlotte, N.C., and Portland, Ore., have hit their lowest points since peaking in 2006 and 2007. Denver and Minneapolis are nearing new lows. High unemployment and rising foreclosures are taking a toll even on markets that never overheated during the boom years.
Home values are dwindling in nearly every American market. Prices fell in November in all but one of the 20 cities in the Standard & Poor's/Case-Shiller index released Tuesday. Eight of those markets hit their lowest point since the housing bubble burst.
The damage from the real estate bubble has spread well beyond Las Vegas, Phoenix and Miami, which built frantically during the mid-2000s, and is sapping prices from coast to coast. In many places, prices are expected to keep falling for at least the next six months.
In Charlotte, homes are going for 2004 prices. Last year, more than half of the homes sold in surrounding Mecklenberg County were foreclosures, says Mark Vitner, a senior economist with Wells Fargo.
"There's a huge oversupply, and a lot of people are struggling," says Vitner, who works in Charlotte. "We're expecting it to fall even further in 2011."
The banking industry, which helped Charlotte boom over the past two decades and accounts for roughly one in every 11 jobs there, was hit hard during the recession. The city lost 12 percent of its financial jobs in 2008 and 2009, according to the Labor Department.
Adding to the region's economic woes, about a third of jobs tied to the auto industry also vanished in the downturn, said Michael Walden, an economist at North Carolina State University in Raleigh. Charlotte's unemployment rate was 12.8 percent a year ago, well above the national rate. It has fallen to 10.8 percent, still more than twice what it was when the recession started.
"We're feeling it, there's no doubt about that," says Mike Shaffer, owner of Century 21 Southern Comfort Realty.
Of course, while foreclosures weaken resale values, they're great for renters who want to own a home.
Robert Hubbard closed on Monday on a three-bedroom, two-bath house in Charlotte that he bought for about $79,000.
While it takes some looking to find the right place, the market is "saturated" with foreclosures, he says.
In Seattle and Portland, the two largest cities in the Pacific Northwest, prices peaked in the summer of 2007 and have fallen back to 2005 levels.
Foreclosures were uncommon in Seattle until about a year ago. Now they're dragging prices down, says Jim Conlan, branch manager for Century 21 North Homes Realty Inc. Home prices in Seattle were down nearly 5 percent in November from a year earlier.
"They're the anchor on the market here that's keeping it from starting to appreciate," Conlan said.
As usual after the holidays, customer traffic at open houses is picking up, he says.
The region's economy grew rapidly from 2002 to 2007 as Boeing rebounded from the post-9/11 drop in aircraft production and tech companies recovered from the dot-com bust. The region expanded at a faster clip than the rest of the country, attracting more people and lifting home prices.
"We had a bubble thing going on like everyone else," says Dick Conway, an economic consultant based in the city.
The region was damaged by the recession. One in every three construction jobs vanishes. Washington Mutual, the nation's largest thrift, collapsed and took 3,500 jobs with it. Seattle unemployment jumped from 4.1 percent in December 2007, when the recession began, to 9.1 percent in November 2010.
Portland home prices have suffered from historically low timber yields and deep cuts within so-called Silicon Forest high-tech companies.
And while Seattle's two biggest employers, Boeing and Microsoft, haven't laid off many workers, they won't need as many new people as the economy improves, Conway says. During the recovery after the 2001 recession, Boeing was a major job generator, directly or indirectly creating 65,000 jobs.
But in this recovery, "it's going to be closer to zero," Conway said.
By ALEX VEIGA and CHRISTOPHER S. RUGABER AP Business Writers
Prices in Seattle, Charlotte, N.C., and Portland, Ore., have hit their lowest points since peaking in 2006 and 2007. Denver and Minneapolis are nearing new lows. High unemployment and rising foreclosures are taking a toll even on markets that never overheated during the boom years.
Home values are dwindling in nearly every American market. Prices fell in November in all but one of the 20 cities in the Standard & Poor's/Case-Shiller index released Tuesday. Eight of those markets hit their lowest point since the housing bubble burst.
The damage from the real estate bubble has spread well beyond Las Vegas, Phoenix and Miami, which built frantically during the mid-2000s, and is sapping prices from coast to coast. In many places, prices are expected to keep falling for at least the next six months.
In Charlotte, homes are going for 2004 prices. Last year, more than half of the homes sold in surrounding Mecklenberg County were foreclosures, says Mark Vitner, a senior economist with Wells Fargo.
"There's a huge oversupply, and a lot of people are struggling," says Vitner, who works in Charlotte. "We're expecting it to fall even further in 2011."
The banking industry, which helped Charlotte boom over the past two decades and accounts for roughly one in every 11 jobs there, was hit hard during the recession. The city lost 12 percent of its financial jobs in 2008 and 2009, according to the Labor Department.
Adding to the region's economic woes, about a third of jobs tied to the auto industry also vanished in the downturn, said Michael Walden, an economist at North Carolina State University in Raleigh. Charlotte's unemployment rate was 12.8 percent a year ago, well above the national rate. It has fallen to 10.8 percent, still more than twice what it was when the recession started.
"We're feeling it, there's no doubt about that," says Mike Shaffer, owner of Century 21 Southern Comfort Realty.
Of course, while foreclosures weaken resale values, they're great for renters who want to own a home.
Robert Hubbard closed on Monday on a three-bedroom, two-bath house in Charlotte that he bought for about $79,000.
While it takes some looking to find the right place, the market is "saturated" with foreclosures, he says.
In Seattle and Portland, the two largest cities in the Pacific Northwest, prices peaked in the summer of 2007 and have fallen back to 2005 levels.
Foreclosures were uncommon in Seattle until about a year ago. Now they're dragging prices down, says Jim Conlan, branch manager for Century 21 North Homes Realty Inc. Home prices in Seattle were down nearly 5 percent in November from a year earlier.
"They're the anchor on the market here that's keeping it from starting to appreciate," Conlan said.
As usual after the holidays, customer traffic at open houses is picking up, he says.
The region's economy grew rapidly from 2002 to 2007 as Boeing rebounded from the post-9/11 drop in aircraft production and tech companies recovered from the dot-com bust. The region expanded at a faster clip than the rest of the country, attracting more people and lifting home prices.
"We had a bubble thing going on like everyone else," says Dick Conway, an economic consultant based in the city.
The region was damaged by the recession. One in every three construction jobs vanishes. Washington Mutual, the nation's largest thrift, collapsed and took 3,500 jobs with it. Seattle unemployment jumped from 4.1 percent in December 2007, when the recession began, to 9.1 percent in November 2010.
Portland home prices have suffered from historically low timber yields and deep cuts within so-called Silicon Forest high-tech companies.
And while Seattle's two biggest employers, Boeing and Microsoft, haven't laid off many workers, they won't need as many new people as the economy improves, Conway says. During the recovery after the 2001 recession, Boeing was a major job generator, directly or indirectly creating 65,000 jobs.
But in this recovery, "it's going to be closer to zero," Conway said.
By ALEX VEIGA and CHRISTOPHER S. RUGABER AP Business Writers
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