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Income Tax Return Preparation

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Income Tax Return Preparation

Income tax return preparation Publication 530 - Main Content Table of Contents What You Can and Cannot DeductHardest Hit Fund and Emergency Homeowners' Loan Programs Real Estate Taxes Sales Taxes Home Mortgage Interest Mortgage Insurance Premiums Mortgage Interest CreditFiguring the Credit BasisFiguring Your Basis Adjusted Basis Keeping Records How To Get Tax HelpLow Income Taxpayer Clinics What You Can and Cannot Deduct To deduct expenses of owning a home, you must file Form 1040, U. Income tax return preparation S. Income tax return preparation Individual Income Tax Return, and itemize your deductions on Schedule A (Form 1040). Income tax return preparation If you itemize, you cannot take the standard deduction. Income tax return preparation This section explains what expenses you can deduct as a homeowner. Income tax return preparation It also points out expenses that you cannot deduct. Income tax return preparation There are four primary discussions: real estate taxes, sales taxes, home mortgage interest, and mortgage insurance premiums. Income tax return preparation Generally, your real estate taxes, home mortgage interest, and mortgage insurance premiums are included in your house payment. Income tax return preparation Your house payment. Income tax return preparation   If you took out a mortgage (loan) to finance the purchase of your home, you probably have to make monthly house payments. Income tax return preparation Your house payment may include several costs of owning a home. Income tax return preparation The only costs you can deduct are real estate taxes actually paid to the taxing authority, interest that qualifies as home mortgage interest, and mortgage insurance premiums. Income tax return preparation These are discussed in more detail later. Income tax return preparation   Some nondeductible expenses that may be included in your house payment include: Fire or homeowner's insurance premiums, and The amount applied to reduce the principal of the mortgage. Income tax return preparation Minister's or military housing allowance. Income tax return preparation   If you are a minister or a member of the uniformed services and receive a housing allowance that is not taxable, you still can deduct your real estate taxes and your home mortgage interest. Income tax return preparation You do not have to reduce your deductions by your nontaxable allowance. Income tax return preparation For more information see Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers, and Publication 3, Armed Forces' Tax Guide. Income tax return preparation Nondeductible payments. Income tax return preparation   You cannot deduct any of the following items. Income tax return preparation Insurance (other than mortgage insurance premiums), including fire and comprehensive coverage, and title insurance. Income tax return preparation Wages you pay for domestic help. Income tax return preparation Depreciation. Income tax return preparation The cost of utilities, such as gas, electricity, or water. Income tax return preparation Most settlement costs. Income tax return preparation See Settlement or closing costs under Cost as Basis, later, for more information. Income tax return preparation Forfeited deposits, down payments, or earnest money. Income tax return preparation Hardest Hit Fund and Emergency Homeowners' Loan Programs You can use a special method to compute your deduction for mortgage interest and real estate taxes on your main home if you meet the following two conditions. Income tax return preparation You received assistance under: A State Housing Finance Agency (State HFA) Hardest Hit Fund program in which program payments could be used to pay mortgage interest, or An Emergency Homeowners' Loan Program administered by the Department of Housing and Urban Development (HUD) or a state. Income tax return preparation You meet the rules to deduct all of the mortgage interest on your loan and all of the real estate taxes on your main home. Income tax return preparation If you meet these tests, then you can deduct all of the payments you actually made during the year to your mortgage servicer, the State HFA, or HUD on the home mortgage (including the amount shown on box 3 of Form 1098-MA, Mortgage Assistance Payments), but not more than the sum of the amounts shown on Form 1098, Mortgage Interest Statement, in box 1 (mortgage interest received), box 4 (mortgage insurance premiums) and box 5 (real property taxes). Income tax return preparation However, you are not required to use this special method to compute your deduction for mortgage interest and real estate taxes on your main home. Income tax return preparation Real Estate Taxes Most state and local governments charge an annual tax on the value of real property. Income tax return preparation This is called a real estate tax. Income tax return preparation You can deduct the tax if it is assessed uniformly at a like rate on all real property throughout the community. Income tax return preparation The proceeds must be for general community or governmental purposes and not be a payment for a special privilege granted or service rendered to you. Income tax return preparation Deductible Real Estate Taxes You can deduct real estate taxes imposed on you. Income tax return preparation You must have paid them either at settlement or closing, or to a taxing authority (either directly or through an escrow account) during the year. Income tax return preparation If you own a cooperative apartment, see Special Rules for Cooperatives , later. Income tax return preparation Where to deduct real estate taxes. Income tax return preparation   Enter the amount of your deductible real estate taxes on Schedule A (Form 1040), line 6. Income tax return preparation Real estate taxes paid at settlement or closing. Income tax return preparation   Real estate taxes are generally divided so that you and the seller each pay taxes for the part of the property tax year you owned the home. Income tax return preparation Your share of these taxes is fully deductible if you itemize your deductions. Income tax return preparation Division of real estate taxes. Income tax return preparation   For federal income tax purposes, the seller is treated as paying the property taxes up to, but not including, the date of sale. Income tax return preparation You (the buyer) are treated as paying the taxes beginning with the date of sale. Income tax return preparation This applies regardless of the lien dates under local law. Income tax return preparation Generally, this information is included on the settlement statement you get at closing. Income tax return preparation   You and the seller each are considered to have paid your own share of the taxes, even if one or the other paid the entire amount. Income tax return preparation You each can deduct your own share, if you itemize deductions, for the year the property is sold. Income tax return preparation Example. Income tax return preparation You bought your home on September 1. Income tax return preparation The property tax year (the period to which the tax relates) in your area is the calendar year. Income tax return preparation The tax for the year was $730 and was due and paid by the seller on August 15. Income tax return preparation You owned your new home during the property tax year for 122 days (September 1 to December 31, including your date of purchase). Income tax return preparation You figure your deduction for real estate taxes on your home as follows. Income tax return preparation 1. Income tax return preparation Enter the total real estate taxes for the real property tax year $730 2. Income tax return preparation Enter the number of days in the property tax year that you owned the property 122 3. Income tax return preparation Divide line 2 by 365 . Income tax return preparation 3342 4. Income tax return preparation Multiply line 1 by line 3. Income tax return preparation This is your deduction. Income tax return preparation Enter it on Schedule A (Form 1040), line 6 $244   You can deduct $244 on your return for the year if you itemize your deductions. Income tax return preparation You are considered to have paid this amount and can deduct it on your return even if, under the contract, you did not have to reimburse the seller. Income tax return preparation Delinquent taxes. Income tax return preparation   Delinquent taxes are unpaid taxes that were imposed on the seller for an earlier tax year. Income tax return preparation If you agree to pay delinquent taxes when you buy your home, you cannot deduct them. Income tax return preparation You treat them as part of the cost of your home. Income tax return preparation See Real estate taxes , later, under Basis. Income tax return preparation Escrow accounts. Income tax return preparation   Many monthly house payments include an amount placed in escrow (put in the care of a third party) for real estate taxes. Income tax return preparation You may not be able to deduct the total you pay into the escrow account. Income tax return preparation You can deduct only the real estate taxes that the lender actually paid from escrow to the taxing authority. Income tax return preparation Your real estate tax bill will show this amount. Income tax return preparation Refund or rebate of real estate taxes. Income tax return preparation   If you receive a refund or rebate of real estate taxes this year for amounts you paid this year, you must reduce your real estate tax deduction by the amount refunded to you. Income tax return preparation If the refund or rebate was for real estate taxes paid for a prior year, you may have to include some or all of the refund in your income. Income tax return preparation For more information, see Recoveries in Publication 525, Taxable and Nontaxable Income. Income tax return preparation Items You Cannot Deduct as Real Estate Taxes The following items are not deductible as real estate taxes. Income tax return preparation Charges for services. Income tax return preparation   An itemized charge for services to specific property or people is not a tax, even if the charge is paid to the taxing authority. Income tax return preparation You cannot deduct the charge as a real estate tax if it is: A unit fee for the delivery of a service (such as a $5 fee charged for every 1,000 gallons of water you use), A periodic charge for a residential service (such as a $20 per month or $240 annual fee charged for trash collection), or A flat fee charged for a single service provided by your local government (such as a $30 charge for mowing your lawn because it had grown higher than permitted under a local ordinance). Income tax return preparation    You must look at your real estate tax bill to decide if any nondeductible itemized charges, such as those listed above, are included in the bill. Income tax return preparation If your taxing authority (or lender) does not furnish you a copy of your real estate tax bill, ask for it. Income tax return preparation Contact the taxing authority if you need additional information about a specific charge on your real estate tax bill. Income tax return preparation Assessments for local benefits. Income tax return preparation   You cannot deduct amounts you pay for local benefits that tend to increase the value of your property. Income tax return preparation Local benefits include the construction of streets, sidewalks, or water and sewer systems. Income tax return preparation You must add these amounts to the basis of your property. Income tax return preparation   You can, however, deduct assessments (or taxes) for local benefits if they are for maintenance, repair, or interest charges related to those benefits. Income tax return preparation An example is a charge to repair an existing sidewalk and any interest included in that charge. Income tax return preparation   If only a part of the assessment is for maintenance, repair, or interest charges, you must be able to show the amount of that part to claim the deduction. Income tax return preparation If you cannot show what part of the assessment is for maintenance, repair, or interest charges, you cannot deduct any of it. Income tax return preparation   An assessment for a local benefit may be listed as an item in your real estate tax bill. Income tax return preparation If so, use the rules in this section to find how much of it, if any, you can deduct. Income tax return preparation Transfer taxes (or stamp taxes). Income tax return preparation   You cannot deduct transfer taxes and similar taxes and charges on the sale of a personal home. Income tax return preparation If you are the buyer and you pay them, include them in the cost basis of the property. Income tax return preparation If you are the seller and you pay them, they are expenses of the sale and reduce the amount realized on the sale. Income tax return preparation Homeowners association assessments. Income tax return preparation   You cannot deduct these assessments because the homeowners association, rather than a state or local government, imposes them. Income tax return preparation Special Rules for Cooperatives If you own a cooperative apartment, some special rules apply to you, though you generally receive the same tax treatment as other homeowners. Income tax return preparation As an owner of a cooperative apartment, you own shares of stock in a corporation that owns or leases housing facilities. Income tax return preparation You can deduct your share of the corporation's deductible real estate taxes if the cooperative housing corporation meets the following conditions: The corporation has only one class of stock outstanding, Each stockholder, solely because of ownership of the stock, can live in a house, apartment, or house trailer owned or leased by the corporation, No stockholder can receive any distribution out of capital, except on a partial or complete liquidation of the corporation, and At least one of the following: At least 80% of the corporation's gross income for the tax year was paid by the tenant-stockholders. Income tax return preparation For this purpose, gross income means all income received during the entire tax year, including any received before the corporation changed to cooperative ownership. Income tax return preparation At least 80% of the total square footage of the corporation's property must be available for use by the tenant-stockholders during the entire tax year. Income tax return preparation At least 90% of the expenditures paid or incurred by the corporation were used for the acquisition, construction, management, maintenance, or care of the property for the benefit of the tenant-shareholders during the entire tax year. Income tax return preparation Tenant-stockholders. Income tax return preparation   A tenant-stockholder can be any entity (such as a corporation, trust, estate, partnership, or association) as well as an individual. Income tax return preparation The tenant-stockholder does not have to live in any of the cooperative's dwelling units. Income tax return preparation The units that the tenant-stockholder has the right to occupy can be rented to others. Income tax return preparation Deductible taxes. Income tax return preparation   You figure your share of real estate taxes in the following way. Income tax return preparation Divide the number of your shares of stock by the total number of shares outstanding, including any shares held by the corporation. Income tax return preparation Multiply the corporation's deductible real estate taxes by the number you figured in (1). Income tax return preparation This is your share of the real estate taxes. Income tax return preparation   Generally, the corporation will tell you your share of its real estate tax. Income tax return preparation This is the amount you can deduct if it reasonably reflects the cost of real estate taxes for your dwelling unit. Income tax return preparation Refund of real estate taxes. Income tax return preparation   If the corporation receives a refund of real estate taxes it paid in an earlier year, it must reduce the amount of real estate taxes paid this year when it allocates the tax expense to you. Income tax return preparation Your deduction for real estate taxes the corporation paid this year is reduced by your share of the refund the corporation received. Income tax return preparation Sales Taxes Generally, you can elect to deduct state and local general sales taxes instead of state and local income taxes as an itemized deduction on Schedule A (Form 1040). Income tax return preparation Deductible sales taxes may include sales taxes paid on your home (including mobile and prefabricated), or home building materials if the tax rate was the same as the general sales tax rate. Income tax return preparation For information on figuring your deduction, see the Instructions for Schedule A (Form 1040). Income tax return preparation If you elect to deduct the sales taxes paid on your home, or home building materials, you cannot include them as part of your cost basis in the home. Income tax return preparation Home Mortgage Interest This section of the publication gives you basic information about home mortgage interest, including information on interest paid at settlement, points, and Form 1098, Mortgage Interest Statement. Income tax return preparation Most home buyers take out a mortgage (loan) to buy their home. Income tax return preparation They then make monthly payments to either the mortgage holder or someone collecting the payments for the mortgage holder. Income tax return preparation Usually, you can deduct the entire part of your payment that is for mortgage interest, if you itemize your deductions on Schedule A (Form 1040). Income tax return preparation However, your deduction may be limited if: Your total mortgage balance is more than $1 million ($500,000 if married filing separately), or You took out a mortgage for reasons other than to buy, build, or improve your home. Income tax return preparation If either of these situations applies to you, see Publication 936 for more information. Income tax return preparation Also see Publication 936 if you later refinance your mortgage or buy a second home. Income tax return preparation Refund of home mortgage interest. Income tax return preparation   If you receive a refund of home mortgage interest that you deducted in an earlier year and that reduced your tax, you generally must include the refund in income in the year you receive it. Income tax return preparation For more information, see Recoveries in Publication 525. Income tax return preparation The amount of the refund will usually be shown on the mortgage interest statement you receive from your mortgage lender. Income tax return preparation See Mortgage Interest Statement , later. Income tax return preparation Deductible Mortgage Interest To be deductible, the interest you pay must be on a loan secured by your main home or a second home. Income tax return preparation The loan can be a first or second mortgage, a home improvement loan, or a home equity loan. Income tax return preparation Prepaid interest. Income tax return preparation   If you pay interest in advance for a period that goes beyond the end of the tax year, you must spread this interest over the tax years to which it applies. Income tax return preparation Generally, you can deduct in each year only the interest that qualifies as home mortgage interest for that year. Income tax return preparation An exception (discussed later) applies to points. Income tax return preparation Late payment charge on mortgage payment. Income tax return preparation   You can deduct as home mortgage interest a late payment charge if it was not for a specific service in connection with your mortgage loan. Income tax return preparation Mortgage prepayment penalty. Income tax return preparation   If you pay off your home mortgage early, you may have to pay a penalty. Income tax return preparation You can deduct that penalty as home mortgage interest provided the penalty is not for a specific service performed or cost incurred in connection with your mortgage loan. Income tax return preparation Ground rent. Income tax return preparation   In some states (such as Maryland), you may buy your home subject to a ground rent. Income tax return preparation A ground rent is an obligation you assume to pay a fixed amount per year on the property. Income tax return preparation Under this arrangement, you are leasing (rather than buying) the land on which your home is located. Income tax return preparation Redeemable ground rents. Income tax return preparation   If you make annual or periodic rental payments on a redeemable ground rent, you can deduct the payments as mortgage interest. Income tax return preparation The ground rent is a redeemable ground rent only if all of the following are true. Income tax return preparation Your lease, including renewal periods, is for more than 15 years. Income tax return preparation You can freely assign the lease. Income tax return preparation You have a present or future right (under state or local law) to end the lease and buy the lessor's entire interest in the land by paying a specified amount. Income tax return preparation The lessor's interest in the land is primarily a security interest to protect the rental payments to which he or she is entitled. Income tax return preparation   Payments made to end the lease and buy the lessor's entire interest in the land are not redeemable ground rents. Income tax return preparation You cannot deduct them. Income tax return preparation Nonredeemable ground rents. Income tax return preparation   Payments on a nonredeemable ground rent are not mortgage interest. Income tax return preparation You can deduct them as rent only if they are a business expense or if they are for rental property. Income tax return preparation Cooperative apartment. Income tax return preparation   You can usually treat the interest on a loan you took out to buy stock in a cooperative housing corporation as home mortgage interest if you own a cooperative apartment, and the cooperative housing corporation meets the conditions described earlier under Special Rules for Cooperatives . Income tax return preparation In addition, you can treat as home mortgage interest your share of the corporation's deductible mortgage interest. Income tax return preparation Figure your share of mortgage interest the same way that is shown for figuring your share of real estate taxes in the Example under Division of real estate taxes, earlier. Income tax return preparation For more information on cooperatives, see Special Rule for Tenant-Stockholders in Cooperative Housing Corporations in Publication 936. Income tax return preparation Refund of cooperative's mortgage interest. Income tax return preparation   You must reduce your mortgage interest deduction by your share of any cash portion of a patronage dividend that the cooperative receives. Income tax return preparation The patronage dividend is a partial refund to the cooperative housing corporation of mortgage interest it paid in a prior year. Income tax return preparation   If you receive a Form 1098 from the cooperative housing corporation, the form should show only the amount you can deduct. Income tax return preparation Mortgage Interest Paid at Settlement One item that normally appears on a settlement or closing statement is home mortgage interest. Income tax return preparation You can deduct the interest that you pay at settlement if you itemize your deductions on Schedule A (Form 1040). Income tax return preparation This amount should be included in the mortgage interest statement provided by your lender. Income tax return preparation See the discussion under Mortgage Interest Statement , later. Income tax return preparation Also, if you pay interest in advance, see Prepaid interest , earlier, and Points , next. Income tax return preparation Points The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. Income tax return preparation Points also may be called loan origination fees, maximum loan charges, loan discount, or discount points. Income tax return preparation A borrower is treated as paying any points that a home seller pays for the borrower's mortgage. Income tax return preparation See Points paid by the seller , later. Income tax return preparation General rule. Income tax return preparation   You cannot deduct the full amount of points in the year paid. Income tax return preparation They are prepaid interest, so you generally must deduct them over the life (term) of the mortgage. Income tax return preparation Exception. Income tax return preparation   You can deduct the full amount of points in the year paid if you meet all the following tests. Income tax return preparation Your loan is secured by your main home. Income tax return preparation (Generally, your main home is the one you live in most of the time. Income tax return preparation ) Paying points is an established business practice in the area where the loan was made. Income tax return preparation The points paid were not more than the points generally charged in that area. Income tax return preparation You use the cash method of accounting. Income tax return preparation This means you report income in the year you receive it and deduct expenses in the year you pay them. Income tax return preparation Most individuals use this method. Income tax return preparation The points were not paid in place of amounts that ordinarily are stated separately on the settlement statement, such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes. Income tax return preparation The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. Income tax return preparation The funds you provided are not required to have been applied to the points. Income tax return preparation They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. Income tax return preparation You cannot have borrowed these funds. Income tax return preparation You use your loan to buy or build your main home. Income tax return preparation The points were computed as a percentage of the principal amount of the mortgage. Income tax return preparation The amount is clearly shown on the settlement statement (such as the Uniform Settlement Statement, Form HUD-1) as points charged for the mortgage. Income tax return preparation The points may be shown as paid from either your funds or the seller's. Income tax return preparation Note. Income tax return preparation If you meet all of the tests listed above and you itemize your deductions in the year you get the loan, you can either deduct the full amount of points in the year paid or deduct them over the life of the loan, beginning in the year you get the loan. Income tax return preparation If you do not itemize your deductions in the year you get the loan, you can spread the points over the life of the loan and deduct the appropriate amount in each future year, if any, when you do itemize your deductions. Income tax return preparation Home improvement loan. Income tax return preparation   You can also fully deduct in the year paid points paid on a loan to improve your main home, if you meet the first six tests listed earlier. Income tax return preparation Refinanced loan. Income tax return preparation   If you use part of the refinanced mortgage proceeds to improve your main home and you meet the first six tests listed earlier, you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds. Income tax return preparation You can deduct the rest of the points over the life of the loan. Income tax return preparation Points not fully deductible in year paid. Income tax return preparation    If you do not qualify under the exception to deduct the full amount of points in the year paid (or choose not to do so), see Points in Publication 936 for the rules on when and how much you can deduct. Income tax return preparation Figure A. Income tax return preparation   You can use Figure A, next, as a quick guide to see whether your points are fully deductible in the year paid. Income tax return preparation    Please click here for the text description of the image. Income tax return preparation Figure A. Income tax return preparation Are my points fully deductible this year? Amounts charged for services. Income tax return preparation   Amounts charged by the lender for specific services connected to the loan are not interest. Income tax return preparation Examples of these charges are: Appraisal fees, Notary fees, and Preparation costs for the mortgage note or deed of trust. Income tax return preparation You cannot deduct these amounts as points either in the year paid or over the life of the mortgage. Income tax return preparation For information about the tax treatment of these amounts and other settlement fees and closing costs, see Basis , later. Income tax return preparation Points paid by the seller. Income tax return preparation   The term “points” includes loan placement fees that the seller pays to the lender to arrange financing for the buyer. Income tax return preparation Treatment by seller. Income tax return preparation   The seller cannot deduct these fees as interest. Income tax return preparation However, they are a selling expense that reduces the seller's amount realized. Income tax return preparation See Publication 523 for more information. Income tax return preparation Treatment by buyer. Income tax return preparation   The buyer treats seller-paid points as if he or she had paid them. Income tax return preparation If all the tests listed earlier under Exception are met, the buyer can deduct the points in the year paid. Income tax return preparation If any of those tests are not met, the buyer must deduct the points over the life of the loan. Income tax return preparation   The buyer must also reduce the basis of the home by the amount of the seller-paid points. Income tax return preparation For more information about the basis of your home, see Basis , later. Income tax return preparation Funds provided are less than points. Income tax return preparation   If you meet all the tests listed earlier under Exception except that the funds you provided were less than the points charged to you (test 6), you can deduct the points in the year paid up to the amount of funds you provided. Income tax return preparation In addition, you can deduct any points paid by the seller. Income tax return preparation Example 1. Income tax return preparation When you took out a $100,000 mortgage loan to buy your home in December, you were charged one point ($1,000). Income tax return preparation You meet all the tests for deducting points in the year paid (see Exception , earlier), except the only funds you provided were a $750 down payment. Income tax return preparation Of the $1,000 you were charged for points, you can deduct $750 in the year paid. Income tax return preparation You spread the remaining $250 over the life of the mortgage. Income tax return preparation Example 2. Income tax return preparation The facts are the same as in Example 1 , except that the person who sold you your home also paid one point ($1,000) to help you get your mortgage. Income tax return preparation In the year paid, you can deduct $1,750 ($750 of the amount you were charged plus the $1,000 paid by the seller). Income tax return preparation You spread the remaining $250 over the life of the mortgage. Income tax return preparation You must reduce the basis of your home by the $1,000 paid by the seller. Income tax return preparation Excess points. Income tax return preparation   If you meet all the tests under Exception , earlier, except that the points paid were more than are generally charged in your area (test 3), you can deduct in the year paid only the points that are generally charged. Income tax return preparation You must spread any additional points over the life of the mortgage. Income tax return preparation Mortgage ending early. Income tax return preparation   If you spread your deduction for points over the life of the mortgage, you can deduct any remaining balance in the year the mortgage ends. Income tax return preparation A mortgage may end early due to a prepayment, refinancing, foreclosure, or similar event. Income tax return preparation Example. Income tax return preparation Dan paid $3,000 in points in 2006 that he had to spread out over the 15-year life of the mortgage. Income tax return preparation He had deducted $1,400 of these points through 2012. Income tax return preparation Dan prepaid his mortgage in full in 2013. Income tax return preparation He can deduct the remaining $1,600 of points in 2013. Income tax return preparation Exception. Income tax return preparation   If you refinance the mortgage with the same lender, you cannot deduct any remaining points for the year. Income tax return preparation Instead, deduct them over the term of the new loan. Income tax return preparation Form 1098. Income tax return preparation   The mortgage interest statement you receive should show not only the total interest paid during the year, but also your deductible points paid during the year. Income tax return preparation See Mortgage Interest Statement , later. Income tax return preparation Where To Deduct Home Mortgage Interest Enter on Schedule A (Form 1040), line 10, the home mortgage interest and points reported to you on Form 1098 (discussed next). Income tax return preparation If you did not receive a Form 1098, enter your deductible interest on line 11, and any deductible points on line 12. Income tax return preparation See Table 1 below for a summary of where to deduct home mortgage interest and real estate taxes. Income tax return preparation If you paid home mortgage interest to the person from whom you bought your home, show that person's name, address, and social security number (SSN) or employer identification number (EIN) on the dotted lines next to line 11. Income tax return preparation The seller must give you this number and you must give the seller your SSN. Income tax return preparation Form W-9, Request for Taxpayer Identification Number and Certification, can be used for this purpose. Income tax return preparation Failure to meet either of these requirements may result in a $50 penalty for each failure. Income tax return preparation Table 1. Income tax return preparation Where To Deduct Interest and Taxes Paid on Your Home See the text for information on what expenses are eligible. Income tax return preparation IF you are eligible to deduct . Income tax return preparation . Income tax return preparation . Income tax return preparation THEN report the amount  on Schedule A (Form 1040) . Income tax return preparation . Income tax return preparation . Income tax return preparation real estate taxes line 6. Income tax return preparation home mortgage interest and points reported on Form 1098 line 10. Income tax return preparation home mortgage interest not reported on  Form 1098 line 11. Income tax return preparation points not reported on Form 1098 line 12. Income tax return preparation qualified mortgage insurance premiums line 13. Income tax return preparation Mortgage Interest Statement If you paid $600 or more of mortgage interest (including certain points and mortgage insurance premiums) during the year on any one mortgage to a mortgage holder in the course of that holder's trade or business, you should receive a Form 1098 or similar statement from the mortgage holder. Income tax return preparation The statement will show the total interest paid on your mortgage during the year. Income tax return preparation If you bought a main home during the year, it also will show the deductible points you paid and any points you can deduct that were paid by the person who sold you your home. Income tax return preparation See Points , earlier. Income tax return preparation The interest you paid at settlement should be included on the statement. Income tax return preparation If it is not, add the interest from the settlement sheet that qualifies as home mortgage interest to the total shown on Form 1098 or similar statement. Income tax return preparation Put the total on Schedule A (Form 1040), line 10, and attach a statement to your return explaining the difference. Income tax return preparation Write “See attached” to the right of line 10. Income tax return preparation A mortgage holder can be a financial institution, a governmental unit, or a cooperative housing corporation. Income tax return preparation If a statement comes from a cooperative housing corporation, it generally will show your share of interest. Income tax return preparation Your mortgage interest statement for 2013 should be provided or sent to you by January 31, 2014. Income tax return preparation If it is mailed, you should allow adequate time to receive it before contacting the mortgage holder. Income tax return preparation A copy of this form will be sent to the IRS also. Income tax return preparation Example. Income tax return preparation You bought a new home on May 3. Income tax return preparation You paid no points on the purchase. Income tax return preparation During the year, you made mortgage payments which included $4,480 deductible interest on your new home. Income tax return preparation The settlement sheet for the purchase of the home included interest of $620 for 29 days in May. Income tax return preparation The mortgage statement you receive from the lender includes total interest of $5,100 ($4,480 + $620). Income tax return preparation You can deduct the $5,100 if you itemize your deductions. Income tax return preparation Refund of overpaid interest. Income tax return preparation   If you receive a refund of mortgage interest you overpaid in a prior year, you generally will receive a Form 1098 showing the refund in box 3. Income tax return preparation Generally, you must include the refund in income in the year you receive it. Income tax return preparation See Refund of home mortgage interest , earlier, under Home Mortgage Interest. Income tax return preparation More than one borrower. Income tax return preparation   If you and at least one other person (other than your spouse if you file a joint return) were liable for and paid interest on a mortgage that was for your home, and the other person received a Form 1098 showing the interest that was paid during the year, attach a statement to your return explaining this. Income tax return preparation Show how much of the interest each of you paid, and give the name and address of the person who received the form. Income tax return preparation Deduct your share of the interest on Schedule A (Form 1040), line 11, and write “See attached” to the right of that line. Income tax return preparation Mortgage Insurance Premiums You may be able to take an itemized deduction on Schedule A (Form 1040), line 13, for premiums you pay or accrue during 2013 for qualified mortgage insurance in connection with home acquisition debt on your qualified home. Income tax return preparation Mortgage insurance premiums you paid or accrued on any mortgage insurance contract issued before January 1, 2007, are not deductible as an itemized deduction. Income tax return preparation Qualified Mortgage Insurance Qualified mortgage insurance is mortgage insurance provided by the Veterans Administration, the Federal Housing Administration, or the Rural Housing Administration, and private mortgage insurance (as defined in section 2 of the Homeowners Protection Act of 1998 as in effect on December 20, 2006). Income tax return preparation Prepaid mortgage insurance premiums. Income tax return preparation   If you paid premiums that are allocable to periods after 2013, you must allocate them over the shorter of: The stated term of the mortgage, or 84 months, beginning with the month the insurance was obtained. Income tax return preparation The premiums are treated as paid in the year to which they were allocated. Income tax return preparation If the mortgage is satisfied before its term, no deduction is allowed for the unamortized balance. Income tax return preparation See Publication 936 for details. Income tax return preparation Exception for certain mortgage insurance. Income tax return preparation   The allocation rules, explained above, do not apply to qualified mortgage insurance provided by the Department of Veterans Affairs or Rural Housing Service. Income tax return preparation Home Acquisition Debt Home acquisition debt is a mortgage you took out after October 13, 1987, to buy, build, or substantially improve a qualified home. Income tax return preparation It also must be secured by that home. Income tax return preparation If the amount of your mortgage is more than the cost of the home plus the cost of any substantial improvements, only the debt that is not more than the cost of the home plus improvements qualifies as home acquisition debt. Income tax return preparation Home acquisition debt limit. Income tax return preparation   The total amount you can treat as home acquisition debt at any time on your home cannot be more than $1 million ($500,000 if married filing separately). Income tax return preparation Discharges of qualified principal residence indebtedness. Income tax return preparation   You can exclude from gross income any discharges of qualified principal residence indebtedness made after 2006 and before 2014. Income tax return preparation You must reduce the basis of your principal residence (but not below zero) by the amount you exclude. Income tax return preparation Principal residence. Income tax return preparation   Your principal residence is the home where you ordinarily live most of the time. Income tax return preparation You can have only one principal residence at any one time. Income tax return preparation Qualified principal residence indebtedness. Income tax return preparation   This is a mortgage that you took out to buy, build, or substantially improve your principal residence and that is secured by that residence. Income tax return preparation If the amount of your original mortgage is more than the cost of your principal residence plus the cost of substantial improvements, qualified principal residence indebtedness cannot be more than the cost of your principal residence plus improvements. Income tax return preparation   Any debt secured by your principal residence that you use to refinance qualified principal residence indebtedness is qualified principal residence indebtedness up to the amount of your old mortgage principal just before the refinancing. Income tax return preparation Additional debt incurred to substantially improve your principal residence is also qualified principal residence indebtedness. Income tax return preparation Amount you can exclude. Income tax return preparation   You can only exclude debt discharged after 2006 and before 2014. Income tax return preparation The most you can exclude is $2 million ($1 million if married filing separately). Income tax return preparation You cannot exclude any amount that was discharged because of services performed for the lender or on account of any other factor not directly related either to a decline in the value of your residence or to your financial condition. Income tax return preparation Ordering rule. Income tax return preparation   If only a part of a loan is qualified principal residence indebtedness, you can exclude only the amount of the discharge that is more than the amount of the loan (immediately before the discharge) that is not qualified principal residence indebtedness. Income tax return preparation Qualified Home This means your main home or your second home. Income tax return preparation A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities. Income tax return preparation Main home. Income tax return preparation   You can have only one main home at any one time. Income tax return preparation This is the home where you ordinarily live most of the time. Income tax return preparation Second home and other special situations. Income tax return preparation   If you have a second home, use part of your home for other than residential living (such as a home office), rent out part of your home, or are having your home constructed, see Qualified Home in Publication 936. Income tax return preparation Limit on Deduction If your adjusted gross income (AGI) on Form 1040, line 38, is more than $100,000 ($50,000 if your filing status is married filing separately), the amount of your mortgage insurance premiums that are deductible is reduced and may be eliminated. Income tax return preparation See Line 13 in the instructions for Schedule A (Form 1040) and complete the Mortgage Insurance Premiums Deduction Worksheet to figure the amount you can deduct. Income tax return preparation If your AGI is more than $109,000 ($54,500 if married filing separately), you cannot deduct your mortgage insurance premiums. Income tax return preparation Form 1098. Income tax return preparation   The amount of mortgage insurance premiums you paid during 2013 should be reported in box 4. Income tax return preparation See Form 1098, Mortgage Interest Statement in Publication 936. Income tax return preparation Mortgage Interest Credit The mortgage interest credit is intended to help lower-income individuals afford home ownership. Income tax return preparation If you qualify, you can claim the credit on Form 8396 each year for part of the home mortgage interest you pay. Income tax return preparation Who qualifies. Income tax return preparation   You may be eligible for the credit if you were issued a qualified Mortgage Credit Certificate (MCC) from your state or local government. Income tax return preparation Generally, an MCC is issued only in connection with a new mortgage for the purchase of your main home. Income tax return preparation The MCC will show the certificate credit rate you will use to figure your credit. Income tax return preparation It also will show the certified indebtedness amount. Income tax return preparation Only the interest on that amount qualifies for the credit. Income tax return preparation See Figuring the Credit , later. Income tax return preparation You must contact the appropriate government agency about getting an MCC before you get a mortgage and buy your home. Income tax return preparation Contact your state or local housing finance agency for information about the availability of MCCs in your area. Income tax return preparation How to claim the credit. Income tax return preparation   To claim the credit, complete Form 8396 and attach it to your Form 1040 or Form 1040NR, U. Income tax return preparation S. Income tax return preparation Nonresident Alien Income Tax Return. Income tax return preparation Include the credit in your total for Form 1040, line 53, or Form 1040NR, line 50; be sure to check box c and write “Form 8396” on that line. Income tax return preparation Reducing your home mortgage interest deduction. Income tax return preparation   If you itemize your deductions on Schedule A (Form 1040), you must reduce your home mortgage interest deduction by the amount of the mortgage interest credit shown on Form 8396, line 3. Income tax return preparation You must do this even if part of that amount is to be carried forward to 2014. Income tax return preparation Selling your home. Income tax return preparation   If you purchase a home after 1990 using an MCC, and you sell that home within 9 years, you may have to recapture (repay) all or part of the benefit you received from the MCC program. Income tax return preparation For additional information, see Recapturing (Paying Back) a Federal Mortgage Subsidy, in Publication 523. Income tax return preparation Figuring the Credit Figure your credit on Form 8396. Income tax return preparation Mortgage not more than certified indebtedness. Income tax return preparation   If your mortgage loan amount is equal to (or smaller than) the certified indebtedness amount shown on your MCC, enter on Form 8396, line 1, all the interest you paid on your mortgage during the year. Income tax return preparation Mortgage more than certified indebtedness. Income tax return preparation   If your mortgage loan amount is larger than the certified indebtedness amount shown on your MCC, you can figure the credit on only part of the interest you paid. Income tax return preparation To find the amount to enter on line 1, multiply the total interest you paid during the year on your mortgage by the following fraction. Income tax return preparation Certified indebtedness amount on your MCC Original amount of your mortgage   The fraction will not change as long as you are entitled to take the mortgage interest credit. Income tax return preparation Example. Income tax return preparation Emily bought a home this year. Income tax return preparation Her mortgage loan is $125,000. Income tax return preparation The certified indebtedness amount on her MCC is $100,000. Income tax return preparation She paid $7,500 interest this year. Income tax return preparation Emily figures the interest to enter on Form 8396, line 1, as follows:   $100,000 = 80% (. Income tax return preparation 80)       $125,000       $7,500 x . Income tax return preparation 80 = $6,000   Emily enters $6,000 on Form 8396, line 1. Income tax return preparation In each later year, she will figure her credit using only 80% of the interest she pays for that year. Income tax return preparation Limits Two limits may apply to your credit. Income tax return preparation A limit based on the credit rate, and A limit based on your tax. Income tax return preparation Limit based on credit rate. Income tax return preparation   If the certificate credit rate is higher than 20%, the credit you are allowed cannot be more than $2,000. Income tax return preparation Limit based on tax. Income tax return preparation   After applying the limit based on the credit rate, your credit generally cannot be more than your tax liability. Income tax return preparation See the Credit Limit Worksheet in the Form 8396 instructions to calculate the limit based on tax. Income tax return preparation Dividing the Credit If two or more persons (other than a married couple filing a joint return) hold an interest in the home to which the MCC relates, the credit must be divided based on the interest held by each person. Income tax return preparation Example. Income tax return preparation John and his brother, George, were issued an MCC. Income tax return preparation They used it to get a mortgage on their main home. Income tax return preparation John has a 60% ownership interest in the home, and George has a 40% ownership interest in the home. Income tax return preparation John paid $5,400 mortgage interest this year and George paid $3,600. Income tax return preparation The MCC shows a credit rate of 25% and a certified indebtedness amount of $130,000. Income tax return preparation The loan amount (mortgage) on their home is $120,000. Income tax return preparation The credit is limited to $2,000 because the credit rate is more than 20%. Income tax return preparation John figures the credit by multiplying the mortgage interest he paid this year ($5,400) by the certificate credit rate (25%) for a total of $1,350. Income tax return preparation His credit is limited to $1,200 ($2,000 × 60%). Income tax return preparation George figures the credit by multiplying the mortgage interest he paid this year ($3,600) by the certificate credit rate (25%) for a total of $900. Income tax return preparation His credit is limited to $800 ($2,000 × 40%). Income tax return preparation Carryforward If your allowable credit is reduced because of the limit based on your tax, you can carry forward the unused portion of the credit to the next 3 years or until used, whichever comes first. Income tax return preparation Example. Income tax return preparation You receive a mortgage credit certificate from State X. Income tax return preparation This year, your regular tax liability is $1,100, you owe no alternative minimum tax, and your mortgage interest credit is $1,700. Income tax return preparation You claim no other credits. Income tax return preparation Your unused mortgage interest credit for this year is $600 ($1,700 − $1,100). Income tax return preparation You can carry forward this amount to the next 3 years or until used, whichever comes first. Income tax return preparation Credit rate more than 20%. Income tax return preparation   If you are subject to the $2,000 limit because your certificate credit rate is more than 20%, you cannot carry forward any amount more than $2,000 (or your share of the $2,000 if you must divide the credit). Income tax return preparation Example. Income tax return preparation In the earlier example under Dividing the Credit , John and George used the entire $2,000 credit. Income tax return preparation The excess   John $1,350 − $1,200 = $150     George $900 − $800 = $100   $150 for John ($1,350 − $1,200) and $100 for George ($900 − $800) cannot be carried forward to future years, despite the respective tax liabilities for John and George. Income tax return preparation Refinancing If you refinance your original mortgage loan on which you had been given an MCC, you must get a new MCC to be able to claim the credit on the new loan. Income tax return preparation The amount of credit you can claim on the new loan may change. Income tax return preparation Table 2 below summarizes how to figure your credit if you refinance your original mortgage loan. Income tax return preparation Table 2. Income tax return preparation Effect of Refinancing on Your Credit IF you get a new (reissued) MCC and the amount of your new mortgage is . Income tax return preparation . Income tax return preparation . Income tax return preparation THEN the interest you claim on Form 8396, line 1, is* . Income tax return preparation . Income tax return preparation . Income tax return preparation smaller than or equal to the certified indebtedness amount on the new MCC all the interest paid during the year on your new mortgage. Income tax return preparation larger than the certified indebtedness amount on the new MCC interest paid during the year on your new mortgage multiplied by the following fraction. Income tax return preparation         certified indebtedness  amount on your new MCC       original amount of your  mortgage   *The credit using the new MCC cannot be more than the credit using the old MCC. Income tax return preparation  See New MCC cannot increase your credit above. Income tax return preparation An issuer may reissue an MCC after you refinance your mortgage. Income tax return preparation If you did not get a new MCC, you may want to contact the state or local housing finance agency that issued your original MCC for information about whether you can get a reissued MCC. Income tax return preparation Year of refinancing. Income tax return preparation   In the year of refinancing, add the applicable amount of interest paid on the old mortgage and the applicable amount of interest paid on the new mortgage, and enter the total on Form 8396, line 1. Income tax return preparation   If your new MCC has a credit rate different from the rate on the old MCC, you must attach a statement to Form 8396. Income tax return preparation The statement must show the calculation for lines 1, 2, and 3 for the part of the year when the old MCC was in effect. Income tax return preparation It must show a separate calculation for the part of the year when the new MCC was in effect. Income tax return preparation Combine the amounts from both calculations for line 3, enter the total on line 3 of the form, and write “See attached” on the dotted line next to line 2. Income tax return preparation New MCC cannot increase your credit. Income tax return preparation   The credit that you claim with your new MCC cannot be more than the credit that you could have claimed with your old MCC. Income tax return preparation   In most cases, the agency that issues your new MCC will make sure that it does not increase your credit. Income tax return preparation However, if either your old loan or your new loan has a variable (adjustable) interest rate, you will need to check this yourself. Income tax return preparation In that case, you will need to know the amount of the credit you could have claimed using the old MCC. Income tax return preparation   There are two methods for figuring the credit you could have claimed. Income tax return preparation Under one method, you figure the actual credit that would have been allowed. Income tax return preparation This means you use the credit rate on the old MCC and the interest you would have paid on the old loan. Income tax return preparation   If your old loan was a variable rate mortgage, you can use another method to determine the credit that you could have claimed. Income tax return preparation Under this method, you figure the credit using a payment schedule of a hypothetical self-amortizing mortgage with level payments projected to the final maturity date of the old mortgage. Income tax return preparation The interest rate of the hypothetical mortgage is the annual percentage rate (APR) of the new mortgage for purposes of the Federal Truth in Lending Act. Income tax return preparation The principal of the hypothetical mortgage is the remaining outstanding balance of the certified mortgage indebtedness shown on the old MCC. Income tax return preparation    You must choose one method and use it consistently beginning with the first tax year for which you claim the credit based on the new MCC. Income tax return preparation    As part of your tax records, you should keep your old MCC and the schedule of payments for your old mortgage. Income tax return preparation Basis Basis is your starting point for figuring a gain or loss if you later sell your home, or for figuring depreciation if you later use part of your home for business purposes or for rent. Income tax return preparation While you own your home, you may add certain items to your basis. Income tax return preparation You may subtract certain other items from your basis. Income tax return preparation These items are called adjustments to basis and are explained later under Adjusted Basis . Income tax return preparation It is important that you understand these terms when you first acquire your home because you must keep track of your basis and adjusted basis during the period you own your home. Income tax return preparation You also must keep records of the events that affect basis or adjusted basis. Income tax return preparation See Keeping Records , below. Income tax return preparation Figuring Your Basis How you figure your basis depends on how you acquire your home. Income tax return preparation If you buy or build your home, your cost is your basis. Income tax return preparation If you receive your home as a gift, your basis is usually the same as the adjusted basis of the person who gave you the property. Income tax return preparation If you inherit your home from a decedent, different rules apply depending on the date of the decedent's death. Income tax return preparation Each of these topics is discussed later. Income tax return preparation Property transferred from a spouse. Income tax return preparation   If your home is transferred to you from your spouse, or from your former spouse as a result of a divorce, your basis is the same as your spouse's (or former spouse's) adjusted basis just before the transfer. Income tax return preparation Publication 504, Divorced or Separated Individuals, fully discusses transfers between spouses. Income tax return preparation Cost as Basis The cost of your home, whether you purchased it or constructed it, is the amount you paid for it, including any debt you assumed. Income tax return preparation The cost of your home includes most settlement or closing costs you paid when you bought the home. Income tax return preparation If you built your home, your cost includes most closing costs paid when you bought the land or settled on your mortgage. Income tax return preparation See Settlement or closing costs , later. Income tax return preparation If you elect to deduct the sales taxes on the purchase or construction of your home as an itemized deduction on Schedule A (Form 1040), you cannot include the sales taxes as part of your cost basis in the home. Income tax return preparation Purchase. Income tax return preparation   The basis of a home you bought is the amount you paid for it. Income tax return preparation This usually includes your down payment and any debt you assumed. Income tax return preparation The basis of a cooperative apartment is the amount you paid for your shares in the corporation that owns or controls the property. Income tax return preparation This amount includes any purchase commissions or other costs of acquiring the shares. Income tax return preparation Construction. Income tax return preparation   If you contracted to have your home built on land that you own, your basis in the home is your basis in the land plus the amount you paid to have the home built. Income tax return preparation This includes the cost of labor and materials, the amount you paid the contractor, any architect's fees, building permit charges, utility meter and connection charges, and legal fees that are directly connected with building your home. Income tax return preparation If you built all or part of your home yourself, your basis is the total amount it cost you to build it. Income tax return preparation You cannot include in basis the value of your own labor or any other labor for which you did not pay. Income tax return preparation Real estate taxes. Income tax return preparation   Real estate taxes are usually divided so that you and the seller each pay taxes for the part of the property tax year that each owned the home. Income tax return preparation See the earlier discussion of Real estate taxes paid at settlement or closing , under Real Estate Taxes, earlier, to figure the real estate taxes you paid or are considered to have paid. Income tax return preparation   If you pay any part of the seller's share of the real estate taxes (the taxes up to the date of sale), and the seller did not reimburse you, add those taxes to your basis in the home. Income tax return preparation You cannot deduct them as taxes paid. Income tax return preparation   If the seller paid any of your share of the real estate taxes (the taxes beginning with the date of sale), you can still deduct those taxes. Income tax return preparation Do not include those taxes in your basis. Income tax return preparation If you did not reimburse the seller, you must reduce your basis by the amount of those taxes. Income tax return preparation Example 1. Income tax return preparation You bought your home on September 1. Income tax return preparation The property tax year in your area is the calendar year, and the tax is due on August 15. Income tax return preparation The real estate taxes on the home you bought were $1,275 for the year and had been paid by the seller on August 15. Income tax return preparation You did not reimburse the seller for your share of the real estate taxes from September 1 through December 31. Income tax return preparation You must reduce the basis of your home by the $426 [(122 ÷ 365) × $1,275] the seller paid for you. Income tax return preparation You can deduct your $426 share of real estate taxes on your return for the year you purchased your home. Income tax return preparation Example 2. Income tax return preparation You bought your home on May 3, 2013. Income tax return preparation The property tax year in your area is the calendar year. Income tax return preparation The taxes for the previous year are assessed on January 2 and are due on May 31 and November 30. Income tax return preparation Under state law, the taxes become a lien on May 31. Income tax return preparation You agreed to pay all taxes due after the date of sale. Income tax return preparation The taxes due in 2013 for 2012 were $1,375. Income tax return preparation The taxes due in 2014 for 2013 will be $1,425. Income tax return preparation You cannot deduct any of the taxes paid in 2013 because they relate to the 2012 property tax year and you did not own the home until 2013. Income tax return preparation Instead, you add the $1,375 to the cost (basis) of your home. Income tax return preparation You owned the home in 2013 for 243 days (May 3 to December 31), so you can take a tax deduction on your 2014 return of $949 [(243 ÷ 365) × $1,425] paid in 2014 for 2013. Income tax return preparation You add the remaining $476 ($1,425 − $949) of taxes paid in 2014 to the cost (basis) of your home. Income tax return preparation Settlement or closing costs. Income tax return preparation   If you bought your home, you probably paid settlement or closing costs in addition to the contract price. Income tax return preparation These costs are divided between you and the seller according to the sales contract, local custom, or understanding of the parties. Income tax return preparation If you built your home, you probably paid these costs when you bought the land or settled on your mortgage. Income tax return preparation   The only settlement or closing costs you can deduct are home mortgage interest and certain real estate taxes. Income tax return preparation You deduct them in the year you buy your home if you itemize your deductions. Income tax return preparation You can add certain other settlement or closing costs to the basis of your home. Income tax return preparation Items added to basis. Income tax return preparation   You can include in your basis the settlement fees and closing costs you paid for buying your home. Income tax return preparation A fee is for buying the home if you would have had to pay it even if you paid cash for the home. Income tax return preparation   The following are some of the settlement fees and closing costs that you can include in the original basis of your home. Income tax return preparation Abstract fees (abstract of title fees). Income tax return preparation Charges for installing utility services. Income tax return preparation Legal fees (including fees for the title search and preparation of the sales contract and deed). Income tax return preparation Recording fees. Income tax return preparation Surveys. Income tax return preparation Transfer or stamp taxes. Income tax return preparation Owner's title insurance. Income tax return preparation Any amount the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, cost for improvements or repairs, and sales commissions. Income tax return preparation   If the seller actually paid for any item for which you are liable and for which you can take a deduction (such as your share of the real estate taxes for the year of sale), you must reduce your basis by that amount unless you are charged for it in the settlement. Income tax return preparation Items not added to basis and not deductible. Income tax return preparation   Here are some settlement and closing costs that you cannot deduct or add to your basis. Income tax return preparation Fire insurance premiums. Income tax return preparation Charges for using utilities or other services related to occupancy of the home before closing. Income tax return preparation Rent for occupying the home before closing. Income tax return preparation Charges connected with getting or refinancing a mortgage loan, such as: Loan assumption fees, Cost of a credit report, and Fee for an appraisal required by a lender. Income tax return preparation Points paid by seller. Income tax return preparation   If you bought your home after April 3, 1994, you must reduce your basis by any points paid for your mortgage by the person who sold you your home. Income tax return preparation   If you bought your home after 1990 but before April 4, 1994, you must reduce your basis by seller-paid points only if you deducted them. Income tax return preparation See Points , earlier, for the rules on deducting points. Income tax return preparation Gift To figure the basis of property you receive as a gift, you must know its adjusted basis (defined later) to the donor just before it was given to you, its fair market value (FMV) at the time it was given to you, and any gift tax paid on it. Income tax return preparation Fair market value. Income tax return preparation   Fair market value (FMV) is the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and who both have a reasonable knowledge of all the necessary facts. Income tax return preparation Donor's adjusted basis is more than FMV. Income tax return preparation   If someone gave you your home and the donor's adjusted basis, when it was given to you, was more than the FMV, your basis at the time of receipt is the same as the donor's adjusted basis. Income tax return preparation Disposition basis. Income tax return preparation   If the donor's adjusted basis at the time of the gift is more than the FMV, your basis (plus or minus any required adjustments, see Adjusted Basis , later) when you dispose of the property will depend on whether you have a gain or a loss. Income tax return preparation Your basis for figuring a gain is the same as the donor's adjusted basis. Income tax return preparation Your basis for figuring a loss is the FMV when you received the gift. Income tax return preparation If you use the donor's adjusted basis to figure a gain and it results in a loss, then you must use the FMV (at the time of the gift) to refigure the loss. Income tax return preparation However, if using the FMV results in a gain, then you neither have a gain nor a loss. Income tax return preparation Example 1. Income tax return preparation Andrew received a house as a gift from Ishmael (the donor). Income tax return preparation At the time of the gift, the home had an FMV of $80,000. Income tax return preparation Ishmael's adjusted basis was $100,000. Income tax return preparation After he received the house, no events occurred to increase or decrease the basis. Income tax return preparation If Andrew sells the house for $120,000, he will have a $20,000 gain because he must use the donor's adjusted basis ($100,000) at the time of the gift as his basis to figure the gain. Income tax return preparation Example 2. Income tax return preparation Same facts as Example 1 , except this time Andrew sells the house for $70,000. Income tax return preparation He will have a loss of $10,000 because he must use the FMV ($80,000) at the time of the gift as his basis to figure the loss. Income tax return preparation Example 3. Income tax return preparation Same facts as Example 1 , except this time Andrew sells the house for $90,000. Income tax return preparation Initially, he figures the gain using Ishmael's adjusted basis ($100,000), which results in a loss of $10,000. Income tax return preparation Since it is a loss, Andrew must now recalculate the loss using the FMV ($80,000), which results in a gain of $10,000. Income tax return preparation So in this situation, Andrew will neither have a gain nor a loss. Income tax return preparation Donor's adjusted basis equal to or less than the FMV. Income tax return preparation   If someone gave you your home after 1976 and the donor's adjusted basis, when it was given to you, was equal to or less than the FMV, your basis at the time of receipt is the same as the donor's adjusted basis, plus the part of any federal gift tax paid that is due to the net increase in value of the home. Income tax return preparation Part of federal gift tax due to net increase in value. Income tax return preparation   Figure the part of the federal gift tax paid that is due to the net increase in value of the home by multiplying the total federal gift tax paid by a fraction. Income tax return preparation The numerator (top part) of the fraction is the net increase in the value of the home, and the denominator (bottom part) is the value of the home for gift tax purposes after reduction for any annual exclusion and marital or charitable deduction that applies to the gift. Income tax return preparation The net increase in the value of the home is its FMV minus the adjusted basis of the donor. Income tax return preparation Publication 551 gives more information, including examples, on figuring your basis when you receive property as a gift. Income tax return preparation Inheritance Your basis in a home you inherited is generally the fair market value of the home on the date of the decedent's death or on the alternative valuation date if the personal representative for the estate chooses to use alternative valuation. Income tax return preparation If an estate tax return was filed, your basis is generally the value of the home listed on the estate tax return. Income tax return preparation If an estate tax return was not filed, your basis is the appraised value of the home at the decedent's date of death for state inheritance or transmission taxes. Income tax return preparation Publication 551 and Publication 559, Survivors, Executors, and Administrators, have more information on the basis of inherited property. Income tax return preparation If you inherited your home from someone who died in 2010, and the executor of the decedent's estate made the election to file Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent, refer to the information provided by the executor or see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010. Income tax return preparation Adjusted Basis While you own your home, various events may take place that can change the original basis of your home. Income tax return preparation These events can increase or decrease your original basis. Income tax return preparation The result is called adjusted basis. Income tax return preparation See Table 3, on this page, for a list of some of the items that can adjust your basis. Income tax return preparation Table 3. Income tax return preparation Adjusted Basis This table lists examples of some items that generally will increase or decrease your basis in your home. Income tax return preparation It is not intended to be all-inclusive. Income tax return preparation Increases to Basis Decreases to Basis Improvements: Putting an addition on your home Replacing an entire roof Paving your driveway Installing central air conditioning Rewiring your home Assessments for local improvements (see Assessments for local benefits , under What You Can and Cannot Deduct, earlier) Amounts spent to restore damaged property Insurance or other reimbursement for casualty losses Deductible casualty loss not covered by insurance Payments received for easement or right-of-way granted Depreciation allowed or allowable if home is used for business or rental purposes Value of subsidy for energy conservation measure excluded from income Improvements. Income tax return preparation   An improvement materially adds to the value of your home, considerably prolongs its useful life, or adapts it to new uses. Income tax return preparation You must add the cost of any improvements to the basis of your home. Income tax return preparation You cannot deduct these costs. Income tax return preparation   Improvements include putting a recreation room in your unfinished basement, adding another bathroom or bedroom, putting up a fence, putting in new plumbing or wiring, installing a new roof, and paving your driveway. Income tax return preparation Amount added to basis. Income tax return preparation   The amount you add to your basis for improvements is your actual cost. Income tax return preparation This includes all costs for material and labor, except your own labor, and all expenses related to the improvement. Income tax return preparation For example, if you had your lot surveyed to put up a fence, the cost of the survey is a part of the cost of the fence. Income tax return preparation   You also must add to your basis state and local assessments for improvements such as streets and sidewalks if they increase the value of the property. Income tax return preparation These assessments are discussed earlier under Real Estate Taxes . Income tax return preparation Improvements no longer part of home. Income tax return preparation    Your home's adjusted basis does not include the cost of any improvements that are replaced and are no longer part of the home. Income tax return preparation Example. Income tax return preparation You put wall-to-wall carpeting in your home 15 years ago. Income tax return preparation Later, you replaced that carpeting with new wall-to-wall carpeting. Income tax return preparation The cost of the old carpeting you replaced is no longer part of your home's adjusted basis. Income tax return preparation Repairs versus improvements. Income tax return preparation   A repair keeps your home in an ordinary, efficient operating condition. Income tax return preparation It does not add to the value of your home or prolong its life. Income tax return preparation Repairs include repainting your home inside or outside, fixing your gutters or floors, fixing leaks or plastering, and replacing broken window panes. Income tax return preparation You cannot deduct repair costs and generally cannot add them to the basis of your home. Income tax return preparation   However, repairs that are done as part of an extensive remodeling or restoration of your home are considered improvements. Income tax return preparation You add them to the basis of your home. Income tax return preparation Records to keep. Income tax return preparation   You can use Table 4 (at the end of the publication) as a guide to help you keep track of improvements to your home. Income tax return preparation Also see Keeping Records , below. Income tax return preparation Energy conservation subsidy. Income tax return preparation   If a public utility gives you (directly or indirectly) a subsidy for the purchase or installation of an energy conservation measure for your home, do not include the value of that subsidy in your income. Income tax return preparation You must reduce the basis of your home by that value. Income tax return preparation   An energy conservation measure is an installation or modification primarily designed to reduce consumption of electricity or natural gas or to improve the management of energy demand. Income tax return preparation Keeping Records Keeping full and accurate records is vital to properly report your income and expenses, to support your deductions and credits, and to know the basis or adjusted basis of your home. Income tax return preparation These records include your purchase contract and settlement papers if you bought the property, or other objective evidence if you acquired it by gift, inheritance, or similar means. Income tax return preparation You should keep any receipts, canceled checks, and similar evidence for improvements or other additions to the basis. Income tax return preparation In addition, you should keep track of any decreases to the basis such as those listed in Table 3, earlier. Income tax return preparation How to keep records. Income tax return preparation   How you keep records is up to you, but they must be clear and accurate and must be available to the IRS. Income tax return preparation How long to keep records. Income tax return preparation   You must keep your records for as long as they are important for meeting any provision of the federal tax law. Income tax return preparation   Keep records that support an item of income, a deduction, or a credit appearing on a return until the period of limitations for the return runs out. Income tax return preparation (A period of limitations is the period of time after which no legal action can be brought. Income tax return preparation ) For assessment of tax you owe, this is generally 3 years from the date you filed the return. Income tax return preparation For filing a claim for credit or refund, this is generally 3 years from the date you filed the original return, or 2 years from the date you paid the tax, whichever is later. Income tax return preparation Returns filed before the due date are treated as filed on the due date. Income tax return preparation   You may need to keep records relating to the basis of property (discussed earlier) for longer than the period of limitations. Income tax return preparation Keep those records as long as they are important in figuring the basis of the original or replacement property. Income tax return preparation Generally, this means for as long as you own the property and, after you dispose of it, for the period of limitations that applies to you. Income tax return preparation Table 4. Income tax return preparation Record of Home Improvements Keep this for your records. Income tax return preparation Also, keep receipts or other proof of improvements. Income tax return preparation Remove from this record any improvements that are no longer part of your main home. Income tax return preparation For example, if you put wall-to-wall carpeting in your home and later replace it with new wall-to-wall carpeting, remove the cost of the first carpeting. Income tax return preparation (a) Type of Improvement (b) Date (c) Amount   (a) Type of Improvement (b) Date (c) Amount Additions:       Heating & Air  Conditioning:     Bedroom       Heating system     Bathroom       Central air conditioning     Deck       Furnace     Garage       Duct work     Porch       Central humidifier     Patio       Filtration system     Storage shed       Other     Fireplace       Electrical:     Other           Lawn & Grounds:       Lighting fixtures           Wiring upgrades     Landscaping       Other     Driveway       Plumbing:     Walkway           Fences       Water heater     Retaining wall       Soft water system     Sprinkler system       Filtration system     Swimming pool       Other     Exterior lighting       Insulation:     Other           Communications:       Attic           Walls     Satellite dish       Floors     Intercom       Pipes and duct work     Security system       Other     Other             Miscellaneous:       Interior  Improvements:     Storm windows and doors       Built-in appliances     Roof       Kitchen modernization     Central vacuum       Bathroom modernization     Other       Flooring             Wall-to-wall carpeting             Other     How To
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Understanding your CP21A Notice

We made the change(s) you requested to your tax return for the tax year specified on the notice. You owe money on your taxes as a result of the change(s).

Tax publications you may find useful

How to get help

Calling the toll free number listed on the top right corner of your notice is the fastest way to get your questions answered.

You can also authorize someone (such as an accountant) to contact the IRS on your behalf using this Power of Attorney and Declaration of Representative (Form 2848).

Or you may qualify for help from a Low Income Taxpayer Clinic.
 


What you need to do

  • Read your notice carefully ― it will explain why you owe money on your taxes.
  • Pay the amount owed by the date on the notice's payment coupon.
  • Make payment arrangements if you can't pay the full amount you owe.
  • Contact us if you disagree with the change(s) we made.
  • Correct the copy of your tax return that you kept for your records.

You may want to...


Answers to Common Questions

The notice says "Based on the information you provided, we changed your 200X Form 1040 to correct your:..." but I don't remember sending any change to IRS. How can I find out what IRS received to initiate this change?
Please contact us at the number listed on the top right corner of your notice for specific information about your tax return.

What do I say when I call the IRS?
Mention that you got a CP21A notice with a balance due and you need to review your account with a customer service representative. Be sure to have a copy of your notice and your tax return before you call.

What should I do if I disagree with the changes you made?
If you disagree, contact us at the toll-free number listed on the top right corner of your notice.

What happens if I can't pay the full amount I owe?
You can arrange to make a payment plan with us if you can't pay the full amount you owe.

Am I charged interest on the money I owe?
If you don't full pay the amount you owe by the date on the payment coupon, interest will accrue on the unpaid balance after that date.

Will I receive a penalty if I can't pay the full amount?
Yes, you'll receive a late payment penalty. You can contact us at the number listed on your notice if you’re unable to pay the full amount shown in your specific notice because of circumstances beyond your control. Contact us by the due date of your payment and, depending on your situation, we may be able to remove the penalty.

Can I set up a payment plan?
Yes. Call the toll-free number listed on the top right corner of your notice to discuss payment options or check out more information on payment options and how to make a payment arrangement.

There are other options, such as paying by credit card. Note: There may be a fee to pay by credit card.

What if I need to make another correction to my account?
You'll need to file Form 1040X, Amended U.S. Individual Income Tax Return.

What if I have tried to get answers and after contacting IRS several times have not been successful?
Call Taxpayer Advocate at 1-877-777-4778 or for TTY/TDD 1-800-829-4059.

What if I think I’m a victim of identity theft?
Please contact us at the number listed on the top right corner of your notice. Refer to the IRS Identity Theft resource page for more information.


Tips for next year

Consider filing your taxes electronically. Filing online can help you avoid mistakes and find credits and deductions that you may qualify for. In many cases you can file for free. Learn more about e-file.

Page Last Reviewed or Updated: 26-Feb-2014

The Income Tax Return Preparation

Income tax return preparation It is critical that business owners correctly determine whether the individuals providing services are employees or independent contractors. Income tax return preparation Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors. Income tax return preparation Select the Scenario that Applies to You: Income tax return preparation I am an independent contractor or in business for myself Income tax return preparation If you are a business owner or contractor who provides services to other businesses, then you are generally considered self-employed. For more information on your tax obligations if you are self-employed (an independent contractor), see our Self-Employed Tax Center. Income tax return preparation I hire or contract with individuals to provide services to my business Income tax return preparation If you are a business owner hiring or contracting with other individuals to provide services, you must determine whether the individuals providing services are employees or independent contractors. Follow the rest of this page to find out more about this topic and what your responsibilities are. Income tax return preparation Determining Whether the Individuals Providing Services are Employees or Independent Contractors Income tax return preparation Before you can determine how to treat payments you make for services, you must first know the business relationship that exists between you and the person performing the services. The person performing the services may be - Income tax return preparation An independent contractor Income tax return preparation An employee (common-law employee) Income tax return preparation A statutory employee Income tax return preparation A statutory nonemployee Income tax return preparation In determining whether the person providing service is an employee or an independent contractor, all information that provides evidence of the degree of control and independence must be considered. Income tax return preparation Common Law Rules Income tax return preparation Facts that provide evidence of the degree of control and independence fall into three categories: Income tax return preparation Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job? Income tax return preparation Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.) Income tax return preparation Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business? Income tax return preparation Businesses must weigh all these factors when determining whether a worker is an employee or independent contractor. Some factors may indicate that the worker is an employee, while other factors indicate that the worker is an independent contractor. There is no “magic” or set number of factors that “makes” the worker an employee or an independent contractor, and no one factor stands alone in making this determination. Also, factors which are relevant in one situation may not be relevant in another. Income tax return preparation The keys are to look at the entire relationship, consider the degree or extent of the right to direct and control, and finally, to document each of the factors used in coming up with the determination. Income tax return preparation Form SS-8 Income tax return preparation If, after reviewing the three categories of evidence, it is still unclear whether a worker is an employee or an independent contractor, Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding (PDF) can be filed with the IRS. The form may be filed by either the business or the worker. The IRS will review the facts and circumstances and officially determine the worker’s status. Income tax return preparation Be aware that it can take at least six months to get a determination, but a business that continually hires the same types of workers to perform particular services may want to consider filing the Form SS-8 (PDF).