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Taxslayer Military

Taxslayer military 14. Taxslayer military   Excise Taxes Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Fuels Used in FarmingBuyer of fuel, including undyed diesel fuel or undyed kerosene. Taxslayer military Undyed diesel fuel, undyed kerosene, and Other Fuels (including alternative fuel). Taxslayer military Custom application of fertilizer and pesticide. Taxslayer military Fuel not used for farming. Taxslayer military Dyed Diesel Fuel and Dyed Kerosene Fuels Used in Off-Highway Business Use Fuels Used for Household Purposes or Other Than as a Fuel for Propulsion Engines How To Claim a Credit or RefundCredit only. Taxslayer military Claiming a Credit Claiming a Refund Including the Credit or Refund in Income Introduction You may be eligible to claim a credit on your income tax return for the federal excise tax on certain fuels. Taxslayer military You may also be eligible to claim a quarterly refund of the fuel taxes during the year, instead of waiting to claim a credit on your income tax return. Taxslayer military Whether you can claim a credit or refund depends on whether the fuel was taxed and the purpose (nontaxable use) for which you used the fuel. Taxslayer military The nontaxable uses of fuel for which a farmer may claim a credit or refund are generally the following. Taxslayer military Use on a farm for farming purposes. Taxslayer military Off-highway business use. Taxslayer military Uses other than as a fuel in a propulsion engine, such as home use. Taxslayer military Table 14-1 presents an overview of credits and refunds that may be claimed for fuels used for the nontaxable uses listed above. Taxslayer military See Publication 510, Excise Taxes, for more information. Taxslayer military Topics - This chapter discusses: Fuels used in farming Dyed diesel fuel and dyed kerosene Fuels used in off-highway business use Fuels used for household purposes How to claim a credit or refund Including the credit or refund in income Useful Items - You may want to see: Publication 510 Excise Taxes Form (and Instructions) 720 Quarterly Federal Excise Tax Return 4136 Credit for Federal Tax Paid on Fuels 8849 Claim for Refund of Excise Taxes See chapter 16 for information about getting publications and forms. Taxslayer military Fuels Used in Farming Owners, operators, and tenants of farms and certain other persons may be eligible to claim a credit or refund of excise taxes on fuel used in the trade or business of farming, when used on a farm in the United States for farming purposes. Taxslayer military See Table 14-1 for a list of available fuel tax credits and refunds. Taxslayer military Fuel is used on a farm for farming purposes only if used in carrying on a trade or business of farming, on a farm in the United States, and for farming purposes. Taxslayer military Farm. Taxslayer military   A farm includes livestock, dairy, fish, poultry, fruit, fur-bearing animals, and truck farms, orchards, plantations, ranches, nurseries, ranges, and feed yards for finishing cattle. Taxslayer military It also includes structures such as greenhouses used primarily for raising agricultural or horticultural commodities. Taxslayer military A fish farm is an area where fish are grown or raised and not merely caught or harvested. Taxslayer military Table 14-1. Taxslayer military Fuel Tax Credits and Refunds at a Glance Use this table to see if you can take a credit or refund for a nontaxable use of the fuel listed. Taxslayer military Fuel Used On a Farm for Farming Purposes Off-Highway Business Use Household Use or Use Other Than as a Fuel1 Gasoline Credit only Credit or refund None Aviation gasoline Credit only None None Undyed diesel fuel and undyed kerosene Credit or refund Credit or refund2 Credit or refund2 Kerosene for use in aviation Credit or refund None None Dyed diesel fuel and dyed kerosene None None None Other Fuels (including alternative fuels)3 Credit or refund Credit or refund None 1For a use other than as fuel in a propulsion engine. Taxslayer military 2Applies to undyed kerosene not sold from a blocked pump or, under certain circumstances, for blending with undyed diesel fuel to be used for heating purposes. Taxslayer military See Reg. Taxslayer military 48. Taxslayer military 6427-10 (b)(1) for the definition of a blocked pump. Taxslayer military 3Other Fuels means any liquid except gas oil, fuel oil, or any product taxable under Internal Revenue Code section 4081. Taxslayer military It includes the alternative fuels: liquefied petroleum gas (LPG),“P” Series fuels, compressed natural gas (CNG), liquefied hydrogen, any liquid fuel derived from coal (including peat) through the Fischer-Tropsch process, liquid fuel derived from biomass, liquid natural gas (LNG), liquefied gas derived from biomass, and compressed gas derived from biomass. Taxslayer military Farming purposes. Taxslayer military   As the owner, tenant, or operator and the ultimate purchaser of fuel that you purchased, you use the fuel on a farm for farming purposes if you use it in any of the following ways. Taxslayer military To cultivate the soil or to raise or harvest any agricultural or horticultural commodity. Taxslayer military To raise, shear, feed, care for, train, or manage livestock, bees, poultry, fur-bearing animals, or wildlife. Taxslayer military To operate, manage, conserve, improve, or maintain your farm and its tools and equipment. Taxslayer military To handle, dry, pack, grade, or store any raw agricultural or horticultural commodity. Taxslayer military For this use to qualify, you must have produced more than half the commodity so treated during the tax year. Taxslayer military The more-than-one-half test applies separately to each commodity. Taxslayer military Commodity means a single raw product. Taxslayer military For example, apples and peaches are two separate commodities. Taxslayer military To plant, cultivate, care for, or cut trees or to prepare (other than sawing logs into lumber, chipping, or other milling) trees for market, but only if these activities are incidental to your farming operations. Taxslayer military Your tree operations are incidental only if they are minor in nature when compared to the total farming operations. Taxslayer military   If any other person, such as a neighbor or custom operator (independent contractor), performs a service for you on your farm for any of the purposes included in list items (1) or (2), above, you are considered to be the ultimate purchaser who used the fuel on a farm for farming purposes. Taxslayer military Therefore, you can still claim the credit or refund for the fuel so used. Taxslayer military However, see Custom application of fertilizer and pesticide, later. Taxslayer military If the other person performs any other services for you on your farm for purposes not included in list items (1) or (2) above, no one can claim the credit or refund for fuel used on your farm for those other services. Taxslayer military Buyer of fuel, including undyed diesel fuel or undyed kerosene. Taxslayer military   If doubt exists whether the owner, tenant, or operator of the farm bought the fuel, determine who actually bore the cost of the fuel. Taxslayer military For example, if the owner of a farm and his or her tenant equally share the cost of gasoline used on the farm, each can claim a credit for the tax on half the fuel used. Taxslayer military Undyed diesel fuel, undyed kerosene, and Other Fuels (including alternative fuel). Taxslayer military   Usually, the farmer is the only person who can make a claim for credit or refund for the tax on undyed diesel fuel, undyed kerosene, or other fuels (including alternative fuel) used for farming purposes. Taxslayer military However, see Custom application of fertilizer and pesticide, next. Taxslayer military Also see Dyed Diesel Fuel and Dyed Kerosene, later. Taxslayer military Example. Taxslayer military Farm owner Haleigh Blue hired custom operator Tyler Steele to cultivate the soil on her farm. Taxslayer military Tyler used 200 gallons of undyed diesel fuel that he purchased to perform the work on Haleigh's farm. Taxslayer military In addition, Haleigh hired contractor Lee Brown to pack and store her apple crop. Taxslayer military Lee bought 25 gallons of undyed diesel fuel to use in packing the apples. Taxslayer military Haleigh can claim the credit for the 200 gallons of undyed diesel fuel used by Tyler on her farm because it qualifies as fuel used on the farm for farming purposes. Taxslayer military No one can claim a credit for the 25 gallons used by Lee because that fuel was not used for a farming purpose included in list items (1) or (2), above. Taxslayer military In the above example, both Tyler Steele and Lee Brown could have purchased dyed (untaxed) diesel fuel for their tasks. Taxslayer military Custom application of fertilizer and pesticide. Taxslayer military   Fuel used on a farm for farming purposes includes fuel used in the application (including aerial application) of fertilizer, pesticides, or other substances. Taxslayer military Generally, the applicator is treated as having used the fuel on a farm for farming purposes. Taxslayer military For applicators using highway vehicles, only the fuel used on the farm is exempt. Taxslayer military Fuel used traveling on the highway to and from the farm is taxable. Taxslayer military Fuel used by an aerial applicator for the direct flight between the airfield and one or more farms is treated as used for a farming purpose. Taxslayer military For aviation gasoline, the aerial applicator makes the claim as the ultimate purchaser. Taxslayer military For kerosene used in aviation, the ultimate purchaser may make the claim or waive the right to make the claim to the registered ultimate vendor. Taxslayer military A sample waiver is included as Model Waiver L in the appendix of Publication 510. Taxslayer military A registered ultimate vendor is the person who sells undyed diesel fuel, undyed kerosene, or kerosene for use in aviation to the user (ultimate purchaser) of the fuel for use on a farm for farming purposes. Taxslayer military To claim a credit or refund of tax, the ultimate vendor must be registered with the Internal Revenue Service at the time the claim is made. Taxslayer military However, registered ultimate vendors cannot make claims for undyed diesel fuel and undyed kerosene sold for use on a farm for farming purposes. Taxslayer military Fuel not used for farming. Taxslayer military   You do not use fuel on a farm for farming purposes when you use it in any of the following ways. Taxslayer military Off the farm, such as on the highway or in noncommercial aviation, even if the fuel is used in transporting livestock, feed, crops, or equipment. Taxslayer military For personal use, such as lawn mowing. Taxslayer military In processing, packaging, freezing, or canning operations. Taxslayer military In processing crude gum into gum spirits of turpentine or gum resin or in processing maple sap into maple syrup or maple sugar. Taxslayer military All-terrain vehicles (ATVs). Taxslayer military   Fuel used in ATVs on a farm for farming purposes, discussed earlier, is eligible for a credit or refund of excise taxes on the fuel. Taxslayer military Fuel used in ATVs for nonfarming purposes is not eligible for a credit or refund of the taxes. Taxslayer military If ATVs are used both for farming and nonfarming purposes, only that portion of the fuel used for farming purposes is eligible for the credit or refund. Taxslayer military Dyed Diesel Fuel and Dyed Kerosene If you purchase dyed diesel fuel or dyed kerosene for a nontaxable use, you must use it only on a farm for farming purposes or for other nontaxable purposes. Taxslayer military For example, you should not use dyed diesel fuel in a truck that is used both on the farm for farming purposes and on the highway, even though the highway use is in connection with farm business. Taxslayer military Excise tax applies to the fuel used by the truck on the highways. Taxslayer military In this situation, undyed (taxed) fuel should be purchased for the truck. Taxslayer military You should keep fuel records of the use of the truck on the farm for farming purposes, and for other uses. Taxslayer military You may be eligible for a credit or refund for the excise tax on fuel used on the farm for farming purposes. Taxslayer military Penalty. Taxslayer military   A penalty is imposed on any person who knowingly uses, sells, or alters dyed diesel fuel or dyed kerosene for any purpose other than a nontaxable use. Taxslayer military The penalty is the greater of $1,000 or $10 per gallon of the dyed diesel fuel or dyed kerosene involved. Taxslayer military After the first violation, the $1,000 portion of the penalty increases depending on the number of violations. Taxslayer military For more information on this penalty, see Publication 510. Taxslayer military Fuels Used in Off-Highway Business Use You may be eligible to claim a credit or refund for the excise tax on fuel used in an off-highway business use. Taxslayer military Off-highway business use. Taxslayer military   This is any use of fuel in a trade or business or in an income-producing activity. Taxslayer military The use must not be in a highway vehicle registered or required to be registered for use on public highways. Taxslayer military Off-highway business use generally does not include any use in a recreational motorboat. Taxslayer military Examples. Taxslayer military   Off-highway business use includes the use of fuels in a trade or business in any of the following ways. Taxslayer military In stationary machines such as generators, compressors, power saws, and similar equipment; For cleaning ; and In forklift trucks, bulldozers, and earthmovers. Taxslayer military   Off-highway nonbusiness (taxable) use of fuel includes: use in minibikes, snowmobiles, power lawn mowers, chain saws, and other yard equipment. Taxslayer military For more information, see Publication 510. Taxslayer military Fuels Used for Household Purposes or Other Than as a Fuel for Propulsion Engines You may be eligible to claim a credit or refund for the excise tax on undyed diesel fuel or kerosene used for home heating, lighting, and cooking. Taxslayer military This also applies to diesel fuel and kerosene used in a home generator to produce electricity for home use. Taxslayer military Home use of a fuel does not include use in a propulsion engine and it is not considered an off-highway business use. Taxslayer military How To Claim a Credit or Refund You may be able to claim a credit or refund of the excise tax on fuels you use for nontaxable uses. Taxslayer military The basic rules for claiming credits and refunds are listed in Table 14-2 . Taxslayer military Table 14-2. Taxslayer military Claiming a Credit or Refund of Excise Taxes This table gives the basic rules for claiming a credit or refund of excise taxes on fuels used for a nontaxable use. Taxslayer military   Credit Refund Which form to use Form 4136, Credit for Federal Tax Paid on Fuels Form 8849, Claim for Refund of Excise Taxes, and Schedule 1 (Form 8849), Nontaxable Use of Fuels Type of form Annual Quarterly When to file With your income tax return By the last day of the quarter following the last quarter included in the claim Amount of tax Any amount $750 or more1 1You may carry over an amount less than $750 to the next quarter. Taxslayer military Keep at your principal place of business all records needed to enable the IRS to verify that you are the person entitled to claim a credit or refund and the amount you claimed. Taxslayer military You do not have to use any special form, but the records should establish the following information. Taxslayer military The total number of gallons bought and used during the period covered by your claim. Taxslayer military The dates of the purchases. Taxslayer military The names and addresses of suppliers and amounts bought from each during the period covered by your claim. Taxslayer military The nontaxable use for which you used the fuel. Taxslayer military The number of gallons used for each nontaxable use. Taxslayer military It is important that your records separately show the number of gallons used for each nontaxable use that qualifies as a claim. Taxslayer military For more information about recordkeeping, see Publication 583, Starting a Business and Keeping Records. Taxslayer military Credit or refund. Taxslayer military   A credit is an amount that reduces the tax on your income tax return when you file it at the end of the year. Taxslayer military If you meet certain requirements, you may claim a refund during the year instead of waiting until you file your income tax return. Taxslayer military Credit only. Taxslayer military   You can claim the following taxes only as a credit on your income tax return. Taxslayer military Tax on gasoline and aviation gasoline you used on a farm for farming purposes. Taxslayer military Tax on fuels (including undyed diesel fuel or undyed kerosene) you used for nontaxable uses if the total for the tax year is less than $750. Taxslayer military Tax on fuel you did not include in any claim for refund previously filed for any quarter of the tax year. Taxslayer military Claiming a Credit You make a claim for a fuel tax credit on Form 4136 and attach it to your income tax return. Taxslayer military Do not claim a credit for any excise tax for which you have filed a refund claim. Taxslayer military How to claim a credit. Taxslayer military   How you claim a credit depends on whether you are an individual, partnership, corporation, S corporation, trust, or farmers' cooperative association. Taxslayer military Individuals. Taxslayer military   You claim the credit on the “Credit for federal tax on fuels” line of your Form 1040. Taxslayer military If you would not otherwise have to file an income tax return, you must do so to get a fuel tax credit. Taxslayer military Partnership. Taxslayer military   Partnerships (other than electing large partnerships) claim the credit by including a statement on Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc. Taxslayer military , showing each partner's share of the number of gallons of each fuel sold or used for a nontaxable use, the type of use, and the applicable credit per gallon. Taxslayer military Each partner claims the credit on his or her income tax return for the partner's share of the fuel used by the partnership. Taxslayer military An electing large partnership can claim the credit on the “Other payments” line of Form 1065-B, U. Taxslayer military S. Taxslayer military Return of Income for Electing Large Partnerships. Taxslayer military Other entities. Taxslayer military   Corporations, S corporations, farmers' cooperative associations, and trusts make the claim on the appropriate line of their income tax return. Taxslayer military When to claim a credit. Taxslayer military   You can claim a fuel tax credit on your income tax return for the year you used the fuel. Taxslayer military You may be able to make a fuel tax claim on an amended income tax return for the year you used the fuel. Taxslayer military A claim for credit or refund of an overpayment must generally be filed within the later of: Three years from the date the original return was filed, or Two years from the date the tax was paid. Taxslayer military Claiming a Refund Generally, you may claim a refund of excise taxes on Form 8849. Taxslayer military Complete and attach to Form 8849 the appropriate Form 8849 schedule(s). Taxslayer military The instructions for Form 8849 and the separate instructions for each schedule explain the requirements for making a claim for refund. Taxslayer military If you file Form 720, you can use its Schedule C for your refund claims for the quarter. Taxslayer military See the Instructions for Form 720. Taxslayer military Do not claim a refund on Form 8849 for any amount for which you have filed or will file a claim on Form 720 or Form 4136. Taxslayer military You may file a claim for refund for any quarter of your tax year for which you can claim $750 or more. Taxslayer military This amount is the excise tax on all fuels used for a nontaxable use during that quarter or any prior quarter (for which no other claim has been filed) during the tax year. Taxslayer military If you cannot claim at least $750 at the end of a quarter, you carry the amount over to the next quarter of your tax year to determine if you can claim at least $750 for that quarter. Taxslayer military If you cannot claim at least $750 at the end of the fourth quarter of your tax year, you must claim a credit on your income tax return using Form 4136. Taxslayer military Only one claim can be filed for a quarter. Taxslayer military You cannot claim a refund for excise tax on gasoline and aviation gasoline used on a farm for farming purposes. Taxslayer military You must claim a credit on your income tax return for the tax. Taxslayer military How to file a quarterly claim. Taxslayer military   File the claim for refund by filling out Schedule 1 (Form 8849) and attaching it to Form 8849. Taxslayer military Send it to the address shown in the instructions. Taxslayer military If you file Form 720, you can use its Schedule C for your refund claims. Taxslayer military See the Instructions for Form 720. Taxslayer military When to file a quarterly claim. Taxslayer military   You must file a quarterly claim by the last day of the first quarter following the last quarter included in the claim. Taxslayer military If you do not file a timely refund claim for the fourth quarter of your tax year, you will have to claim a credit for that amount on your income tax return, as discussed earlier. Taxslayer military    In most situations, the amount claimed as a credit or refund will be less than the amount deducted as fuel tax expense because the Leaking Underground Storage Tank (LUST) tax of $0. Taxslayer military 001 per gallon is generally not subject to credit or refund. Taxslayer military Including the Credit or Refund in Income Include any credit or refund of excise taxes on fuels in your gross income if you claimed the total cost of the fuel (including the excise taxes) as an expense deduction that reduced your income tax liability. Taxslayer military Which year you include a credit or refund in gross income depends on whether you use the cash or an accrual method of accounting. Taxslayer military Cash method. Taxslayer military   If you use the cash method and file a claim for refund, include the refund amount in gross income for the tax year in which you receive the refund. Taxslayer military If you claim a credit on your income tax return, include the credit amount in gross income for the tax year in which you file Form 4136. Taxslayer military If you file an amended return and claim a credit, include the credit amount in gross income for the tax year in which you receive the credit. Taxslayer military Example. Taxslayer military Sharon Brown, a farmer who uses the cash method, filed her 2012 Form 1040 on March 3, 2013. Taxslayer military On her Schedule F, she deducted the total cost of gasoline (including $110 of excise taxes) used on the farm for farming purposes. Taxslayer military Then, on Form 4136, she claimed the $110 as a credit. Taxslayer military Sharon reports the $110 as other income on line 8b of her 2013 Schedule F. Taxslayer military Accrual method. Taxslayer military   If you use an accrual method, include the amount of credit or refund in gross income for the tax year in which you used the fuels. Taxslayer military It does not matter whether you filed for a quarterly refund or claimed the entire amount as a credit. Taxslayer military Example. Taxslayer military Patty Green, a farmer who uses the accrual method, files her 2012 Form 1040 on April 15, 2013. Taxslayer military On Schedule F, she deducts the total cost of gasoline (including $155 of excise taxes) she used on the farm for farming purposes during 2012. Taxslayer military On Form 4136, Patty claims the $155 as a credit. Taxslayer military She reports the $155 as other income on line 8b of her 2012 Schedule F. Taxslayer military Prev  Up  Next   Home   More Online Publications
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Contact My Local Office in Maine

Face-to-face Tax Help

IRS Taxpayer Assistance Centers (TACs) are your source for personal tax help when you believe your tax issue can only be handled face-to-face. No appointment is necessary.

Keep in mind, many questions can be resolved online without waiting in line. Through IRS.gov you can:
• Set up a payment plan.
• Get a transcript of your tax return.
• Make a payment.
• Check on your refund.
• Find answers to many of your tax questions.

We are now referring all requests for tax return preparation services to other available resources. You can take advantage of free tax preparation through Free File, Free File Fillable Forms or through a volunteer site in your community. To find the nearest volunteer site location or to get more information about Free File, go to the top of the page and enter “Free Tax Help” in the Search box.

If you have a tax account issues and feel that it requires talking with someone face-to-face, visit your local TAC.

Caution:  Many of our offices are located in Federal Office Buildings. These buildings may not allow visitors to bring in cell phones with camera capabilities.

Multilingual assistance is available in every office. Hours of operation are subject to change.

Before visiting your local office click on "Services Provided" in the chart below to see what services are available. Services are limited and not all services are available at every TAC office and may vary from site to site. You can get these services on a walk-in basis.

 City Street Address  Days/Hours of Service  Telephone* 
Augusta  68 Sewall St.
Augusta, ME  04330 

Monday-Friday - 8:30 a.m.-4:30 p.m.

 

Services Provided

(207) 622-1508 
Bangor  202 Harlow St.
Bangor, ME  04401 

Monday-Friday - 8:30 a.m.- 4:30 p.m.
(Closed for lunch 11:30 a.m. - 12:30 p.m.)

 

Services Provided

(207) 942-8573 
Lewiston  217 Main St.
Lewiston, ME 04240 

Monday-Friday - 8:30 a.m.- 4:30 p.m. 
(Closed for lunch 1:30 p.m. - 2:30 p.m.)

 

Services Provided

(207) 782-6795 
Presque Isle  36 North St.
Presque Isle, ME  04769 

Monday - Friday - 8:30 a.m. - 4:30 p.m. 
(Closed for lunch 1:00 p.m. - 2:00 p.m.)

 

** This office will be closed 5/14-5/16 and 5/19-5/21**

 

Services Provided

(207) 764-0947 
South Portland  220 Maine Mall Rd.
So. Portland, ME  04106 

Monday-Friday - 8:30 a.m. - 4:30 p.m.
(Closed for lunch 1:00 p.m. - 2:00 p.m.)
 

Services Provided

(207) 879-4683 

* Note: The phone numbers in the chart above are not toll-free for all locations. When you call, you will reach a recorded business message with information about office hours, locations and services provided in that office. If face-to-face assistance is not a priority for you, you may also get help with IRS letters or resolve tax account issues by phone, toll free at 1-800-829-1040 (individuals) or 1-800-829-4933 (businesses).

For information on where to file your tax return please see Where to File Addresses.

The Taxpayer Advocate Service: Call (207)622-8528 in Augusta or 1-877-777-4778 elsewhere, or see Publication 1546, The Taxpayer Advocate Service of the IRS. For further information, see Tax Topic 104.

Partnerships

IRS and organizations all over the country are partnering to assist taxpayers. Through these partnerships, organizations are also achieving their own goals. These mutually beneficial partnerships are strengthening outreach efforts and bringing education and assistance to millions.

For more information about these programs for individuals and families, contact the Stakeholder Partnerships, Education and Communication Office at:

Internal Revenue Service
220 Maine Mall Rd., 2nd Floor
So. Portland, ME 04106

For more information about these programs for businesses, your local Stakeholder Liaison office establishes relationships with organizations representing small business and self-employed taxpayers. They provide information about the policies, practices and procedures the IRS uses to ensure compliance with the tax laws. To establish a relationship with us, use this list to find a contact in your state:

Stakeholder Liaison (SL) Phone Numbers for Organizations Representing Small Businesses and Self-employed Taxpayers.

Page Last Reviewed or Updated: 28-Mar-2014

The Taxslayer Military

Taxslayer military 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. Taxslayer military S. Taxslayer military Individual Income Tax Return, and itemize your deductions on Schedule A (Form 1040). Taxslayer military If you itemize, you cannot take the standard deduction. Taxslayer military This section explains what expenses you can deduct as a homeowner. Taxslayer military It also points out expenses that you cannot deduct. Taxslayer military There are four primary discussions: real estate taxes, sales taxes, home mortgage interest, and mortgage insurance premiums. Taxslayer military Generally, your real estate taxes, home mortgage interest, and mortgage insurance premiums are included in your house payment. Taxslayer military Your house payment. Taxslayer military   If you took out a mortgage (loan) to finance the purchase of your home, you probably have to make monthly house payments. Taxslayer military Your house payment may include several costs of owning a home. Taxslayer military 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. Taxslayer military These are discussed in more detail later. Taxslayer military   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. Taxslayer military Minister's or military housing allowance. Taxslayer military   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. Taxslayer military You do not have to reduce your deductions by your nontaxable allowance. Taxslayer military 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. Taxslayer military Nondeductible payments. Taxslayer military   You cannot deduct any of the following items. Taxslayer military Insurance (other than mortgage insurance premiums), including fire and comprehensive coverage, and title insurance. Taxslayer military Wages you pay for domestic help. Taxslayer military Depreciation. Taxslayer military The cost of utilities, such as gas, electricity, or water. Taxslayer military Most settlement costs. Taxslayer military See Settlement or closing costs under Cost as Basis, later, for more information. Taxslayer military Forfeited deposits, down payments, or earnest money. Taxslayer military 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. Taxslayer military 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. Taxslayer military 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. Taxslayer military 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). Taxslayer military 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. Taxslayer military Real Estate Taxes Most state and local governments charge an annual tax on the value of real property. Taxslayer military This is called a real estate tax. Taxslayer military You can deduct the tax if it is assessed uniformly at a like rate on all real property throughout the community. Taxslayer military 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. Taxslayer military Deductible Real Estate Taxes You can deduct real estate taxes imposed on you. Taxslayer military 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. Taxslayer military If you own a cooperative apartment, see Special Rules for Cooperatives , later. Taxslayer military Where to deduct real estate taxes. Taxslayer military   Enter the amount of your deductible real estate taxes on Schedule A (Form 1040), line 6. Taxslayer military Real estate taxes paid at settlement or closing. Taxslayer military   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. Taxslayer military Your share of these taxes is fully deductible if you itemize your deductions. Taxslayer military Division of real estate taxes. Taxslayer military   For federal income tax purposes, the seller is treated as paying the property taxes up to, but not including, the date of sale. Taxslayer military You (the buyer) are treated as paying the taxes beginning with the date of sale. Taxslayer military This applies regardless of the lien dates under local law. Taxslayer military Generally, this information is included on the settlement statement you get at closing. Taxslayer military   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. Taxslayer military You each can deduct your own share, if you itemize deductions, for the year the property is sold. Taxslayer military Example. Taxslayer military You bought your home on September 1. Taxslayer military The property tax year (the period to which the tax relates) in your area is the calendar year. Taxslayer military The tax for the year was $730 and was due and paid by the seller on August 15. Taxslayer military You owned your new home during the property tax year for 122 days (September 1 to December 31, including your date of purchase). Taxslayer military You figure your deduction for real estate taxes on your home as follows. Taxslayer military 1. Taxslayer military Enter the total real estate taxes for the real property tax year $730 2. Taxslayer military Enter the number of days in the property tax year that you owned the property 122 3. Taxslayer military Divide line 2 by 365 . Taxslayer military 3342 4. Taxslayer military Multiply line 1 by line 3. Taxslayer military This is your deduction. Taxslayer military 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. Taxslayer military 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. Taxslayer military Delinquent taxes. Taxslayer military   Delinquent taxes are unpaid taxes that were imposed on the seller for an earlier tax year. Taxslayer military If you agree to pay delinquent taxes when you buy your home, you cannot deduct them. Taxslayer military You treat them as part of the cost of your home. Taxslayer military See Real estate taxes , later, under Basis. Taxslayer military Escrow accounts. Taxslayer military   Many monthly house payments include an amount placed in escrow (put in the care of a third party) for real estate taxes. Taxslayer military You may not be able to deduct the total you pay into the escrow account. Taxslayer military You can deduct only the real estate taxes that the lender actually paid from escrow to the taxing authority. Taxslayer military Your real estate tax bill will show this amount. Taxslayer military Refund or rebate of real estate taxes. Taxslayer military   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. Taxslayer military 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. Taxslayer military For more information, see Recoveries in Publication 525, Taxable and Nontaxable Income. Taxslayer military Items You Cannot Deduct as Real Estate Taxes The following items are not deductible as real estate taxes. Taxslayer military Charges for services. Taxslayer military   An itemized charge for services to specific property or people is not a tax, even if the charge is paid to the taxing authority. Taxslayer military 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). Taxslayer military    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. Taxslayer military If your taxing authority (or lender) does not furnish you a copy of your real estate tax bill, ask for it. Taxslayer military Contact the taxing authority if you need additional information about a specific charge on your real estate tax bill. Taxslayer military Assessments for local benefits. Taxslayer military   You cannot deduct amounts you pay for local benefits that tend to increase the value of your property. Taxslayer military Local benefits include the construction of streets, sidewalks, or water and sewer systems. Taxslayer military You must add these amounts to the basis of your property. Taxslayer military   You can, however, deduct assessments (or taxes) for local benefits if they are for maintenance, repair, or interest charges related to those benefits. Taxslayer military An example is a charge to repair an existing sidewalk and any interest included in that charge. Taxslayer military   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. Taxslayer military If you cannot show what part of the assessment is for maintenance, repair, or interest charges, you cannot deduct any of it. Taxslayer military   An assessment for a local benefit may be listed as an item in your real estate tax bill. Taxslayer military If so, use the rules in this section to find how much of it, if any, you can deduct. Taxslayer military Transfer taxes (or stamp taxes). Taxslayer military   You cannot deduct transfer taxes and similar taxes and charges on the sale of a personal home. Taxslayer military If you are the buyer and you pay them, include them in the cost basis of the property. Taxslayer military If you are the seller and you pay them, they are expenses of the sale and reduce the amount realized on the sale. Taxslayer military Homeowners association assessments. Taxslayer military   You cannot deduct these assessments because the homeowners association, rather than a state or local government, imposes them. Taxslayer military 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. Taxslayer military As an owner of a cooperative apartment, you own shares of stock in a corporation that owns or leases housing facilities. Taxslayer military 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. Taxslayer military For this purpose, gross income means all income received during the entire tax year, including any received before the corporation changed to cooperative ownership. Taxslayer military 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. Taxslayer military 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. Taxslayer military Tenant-stockholders. Taxslayer military   A tenant-stockholder can be any entity (such as a corporation, trust, estate, partnership, or association) as well as an individual. Taxslayer military The tenant-stockholder does not have to live in any of the cooperative's dwelling units. Taxslayer military The units that the tenant-stockholder has the right to occupy can be rented to others. Taxslayer military Deductible taxes. Taxslayer military   You figure your share of real estate taxes in the following way. Taxslayer military Divide the number of your shares of stock by the total number of shares outstanding, including any shares held by the corporation. Taxslayer military Multiply the corporation's deductible real estate taxes by the number you figured in (1). Taxslayer military This is your share of the real estate taxes. Taxslayer military   Generally, the corporation will tell you your share of its real estate tax. Taxslayer military This is the amount you can deduct if it reasonably reflects the cost of real estate taxes for your dwelling unit. Taxslayer military Refund of real estate taxes. Taxslayer military   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. Taxslayer military Your deduction for real estate taxes the corporation paid this year is reduced by your share of the refund the corporation received. Taxslayer military 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). Taxslayer military 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. Taxslayer military For information on figuring your deduction, see the Instructions for Schedule A (Form 1040). Taxslayer military 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. Taxslayer military 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. Taxslayer military Most home buyers take out a mortgage (loan) to buy their home. Taxslayer military They then make monthly payments to either the mortgage holder or someone collecting the payments for the mortgage holder. Taxslayer military 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). Taxslayer military 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. Taxslayer military If either of these situations applies to you, see Publication 936 for more information. Taxslayer military Also see Publication 936 if you later refinance your mortgage or buy a second home. Taxslayer military Refund of home mortgage interest. Taxslayer military   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. Taxslayer military For more information, see Recoveries in Publication 525. Taxslayer military The amount of the refund will usually be shown on the mortgage interest statement you receive from your mortgage lender. Taxslayer military See Mortgage Interest Statement , later. Taxslayer military Deductible Mortgage Interest To be deductible, the interest you pay must be on a loan secured by your main home or a second home. Taxslayer military The loan can be a first or second mortgage, a home improvement loan, or a home equity loan. Taxslayer military Prepaid interest. Taxslayer military   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. Taxslayer military Generally, you can deduct in each year only the interest that qualifies as home mortgage interest for that year. Taxslayer military An exception (discussed later) applies to points. Taxslayer military Late payment charge on mortgage payment. Taxslayer military   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. Taxslayer military Mortgage prepayment penalty. Taxslayer military   If you pay off your home mortgage early, you may have to pay a penalty. Taxslayer military 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. Taxslayer military Ground rent. Taxslayer military   In some states (such as Maryland), you may buy your home subject to a ground rent. Taxslayer military A ground rent is an obligation you assume to pay a fixed amount per year on the property. Taxslayer military Under this arrangement, you are leasing (rather than buying) the land on which your home is located. Taxslayer military Redeemable ground rents. Taxslayer military   If you make annual or periodic rental payments on a redeemable ground rent, you can deduct the payments as mortgage interest. Taxslayer military The ground rent is a redeemable ground rent only if all of the following are true. Taxslayer military Your lease, including renewal periods, is for more than 15 years. Taxslayer military You can freely assign the lease. Taxslayer military 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. Taxslayer military The lessor's interest in the land is primarily a security interest to protect the rental payments to which he or she is entitled. Taxslayer military   Payments made to end the lease and buy the lessor's entire interest in the land are not redeemable ground rents. Taxslayer military You cannot deduct them. Taxslayer military Nonredeemable ground rents. Taxslayer military   Payments on a nonredeemable ground rent are not mortgage interest. Taxslayer military You can deduct them as rent only if they are a business expense or if they are for rental property. Taxslayer military Cooperative apartment. Taxslayer military   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 . Taxslayer military In addition, you can treat as home mortgage interest your share of the corporation's deductible mortgage interest. Taxslayer military 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. Taxslayer military For more information on cooperatives, see Special Rule for Tenant-Stockholders in Cooperative Housing Corporations in Publication 936. Taxslayer military Refund of cooperative's mortgage interest. Taxslayer military   You must reduce your mortgage interest deduction by your share of any cash portion of a patronage dividend that the cooperative receives. Taxslayer military The patronage dividend is a partial refund to the cooperative housing corporation of mortgage interest it paid in a prior year. Taxslayer military   If you receive a Form 1098 from the cooperative housing corporation, the form should show only the amount you can deduct. Taxslayer military Mortgage Interest Paid at Settlement One item that normally appears on a settlement or closing statement is home mortgage interest. Taxslayer military You can deduct the interest that you pay at settlement if you itemize your deductions on Schedule A (Form 1040). Taxslayer military This amount should be included in the mortgage interest statement provided by your lender. Taxslayer military See the discussion under Mortgage Interest Statement , later. Taxslayer military Also, if you pay interest in advance, see Prepaid interest , earlier, and Points , next. Taxslayer military Points The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. Taxslayer military Points also may be called loan origination fees, maximum loan charges, loan discount, or discount points. Taxslayer military A borrower is treated as paying any points that a home seller pays for the borrower's mortgage. Taxslayer military See Points paid by the seller , later. Taxslayer military General rule. Taxslayer military   You cannot deduct the full amount of points in the year paid. Taxslayer military They are prepaid interest, so you generally must deduct them over the life (term) of the mortgage. Taxslayer military Exception. Taxslayer military   You can deduct the full amount of points in the year paid if you meet all the following tests. Taxslayer military Your loan is secured by your main home. Taxslayer military (Generally, your main home is the one you live in most of the time. Taxslayer military ) Paying points is an established business practice in the area where the loan was made. Taxslayer military The points paid were not more than the points generally charged in that area. Taxslayer military You use the cash method of accounting. Taxslayer military This means you report income in the year you receive it and deduct expenses in the year you pay them. Taxslayer military Most individuals use this method. Taxslayer military 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. Taxslayer military The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. Taxslayer military The funds you provided are not required to have been applied to the points. Taxslayer military They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. Taxslayer military You cannot have borrowed these funds. Taxslayer military You use your loan to buy or build your main home. Taxslayer military The points were computed as a percentage of the principal amount of the mortgage. Taxslayer military The amount is clearly shown on the settlement statement (such as the Uniform Settlement Statement, Form HUD-1) as points charged for the mortgage. Taxslayer military The points may be shown as paid from either your funds or the seller's. Taxslayer military Note. Taxslayer military 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. Taxslayer military 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. Taxslayer military Home improvement loan. Taxslayer military   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. Taxslayer military Refinanced loan. Taxslayer military   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. Taxslayer military You can deduct the rest of the points over the life of the loan. Taxslayer military Points not fully deductible in year paid. Taxslayer military    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. Taxslayer military Figure A. Taxslayer military   You can use Figure A, next, as a quick guide to see whether your points are fully deductible in the year paid. Taxslayer military    Please click here for the text description of the image. Taxslayer military Figure A. Taxslayer military Are my points fully deductible this year? Amounts charged for services. Taxslayer military   Amounts charged by the lender for specific services connected to the loan are not interest. Taxslayer military Examples of these charges are: Appraisal fees, Notary fees, and Preparation costs for the mortgage note or deed of trust. Taxslayer military You cannot deduct these amounts as points either in the year paid or over the life of the mortgage. Taxslayer military For information about the tax treatment of these amounts and other settlement fees and closing costs, see Basis , later. Taxslayer military Points paid by the seller. Taxslayer military   The term “points” includes loan placement fees that the seller pays to the lender to arrange financing for the buyer. Taxslayer military Treatment by seller. Taxslayer military   The seller cannot deduct these fees as interest. Taxslayer military However, they are a selling expense that reduces the seller's amount realized. Taxslayer military See Publication 523 for more information. Taxslayer military Treatment by buyer. Taxslayer military   The buyer treats seller-paid points as if he or she had paid them. Taxslayer military If all the tests listed earlier under Exception are met, the buyer can deduct the points in the year paid. Taxslayer military If any of those tests are not met, the buyer must deduct the points over the life of the loan. Taxslayer military   The buyer must also reduce the basis of the home by the amount of the seller-paid points. Taxslayer military For more information about the basis of your home, see Basis , later. Taxslayer military Funds provided are less than points. Taxslayer military   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. Taxslayer military In addition, you can deduct any points paid by the seller. Taxslayer military Example 1. Taxslayer military When you took out a $100,000 mortgage loan to buy your home in December, you were charged one point ($1,000). Taxslayer military 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. Taxslayer military Of the $1,000 you were charged for points, you can deduct $750 in the year paid. Taxslayer military You spread the remaining $250 over the life of the mortgage. Taxslayer military Example 2. Taxslayer military 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. Taxslayer military In the year paid, you can deduct $1,750 ($750 of the amount you were charged plus the $1,000 paid by the seller). Taxslayer military You spread the remaining $250 over the life of the mortgage. Taxslayer military You must reduce the basis of your home by the $1,000 paid by the seller. Taxslayer military Excess points. Taxslayer military   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. Taxslayer military You must spread any additional points over the life of the mortgage. Taxslayer military Mortgage ending early. Taxslayer military   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. Taxslayer military A mortgage may end early due to a prepayment, refinancing, foreclosure, or similar event. Taxslayer military Example. Taxslayer military Dan paid $3,000 in points in 2006 that he had to spread out over the 15-year life of the mortgage. Taxslayer military He had deducted $1,400 of these points through 2012. Taxslayer military Dan prepaid his mortgage in full in 2013. Taxslayer military He can deduct the remaining $1,600 of points in 2013. Taxslayer military Exception. Taxslayer military   If you refinance the mortgage with the same lender, you cannot deduct any remaining points for the year. Taxslayer military Instead, deduct them over the term of the new loan. Taxslayer military Form 1098. Taxslayer military   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. Taxslayer military See Mortgage Interest Statement , later. Taxslayer military 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). Taxslayer military If you did not receive a Form 1098, enter your deductible interest on line 11, and any deductible points on line 12. Taxslayer military See Table 1 below for a summary of where to deduct home mortgage interest and real estate taxes. Taxslayer military 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. Taxslayer military The seller must give you this number and you must give the seller your SSN. Taxslayer military Form W-9, Request for Taxpayer Identification Number and Certification, can be used for this purpose. Taxslayer military Failure to meet either of these requirements may result in a $50 penalty for each failure. Taxslayer military Table 1. Taxslayer military Where To Deduct Interest and Taxes Paid on Your Home See the text for information on what expenses are eligible. Taxslayer military IF you are eligible to deduct . Taxslayer military . Taxslayer military . Taxslayer military THEN report the amount  on Schedule A (Form 1040) . Taxslayer military . Taxslayer military . Taxslayer military real estate taxes line 6. Taxslayer military home mortgage interest and points reported on Form 1098 line 10. Taxslayer military home mortgage interest not reported on  Form 1098 line 11. Taxslayer military points not reported on Form 1098 line 12. Taxslayer military qualified mortgage insurance premiums line 13. Taxslayer military 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. Taxslayer military The statement will show the total interest paid on your mortgage during the year. Taxslayer military 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. Taxslayer military See Points , earlier. Taxslayer military The interest you paid at settlement should be included on the statement. Taxslayer military 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. Taxslayer military Put the total on Schedule A (Form 1040), line 10, and attach a statement to your return explaining the difference. Taxslayer military Write “See attached” to the right of line 10. Taxslayer military A mortgage holder can be a financial institution, a governmental unit, or a cooperative housing corporation. Taxslayer military If a statement comes from a cooperative housing corporation, it generally will show your share of interest. Taxslayer military Your mortgage interest statement for 2013 should be provided or sent to you by January 31, 2014. Taxslayer military If it is mailed, you should allow adequate time to receive it before contacting the mortgage holder. Taxslayer military A copy of this form will be sent to the IRS also. Taxslayer military Example. Taxslayer military You bought a new home on May 3. Taxslayer military You paid no points on the purchase. Taxslayer military During the year, you made mortgage payments which included $4,480 deductible interest on your new home. Taxslayer military The settlement sheet for the purchase of the home included interest of $620 for 29 days in May. Taxslayer military The mortgage statement you receive from the lender includes total interest of $5,100 ($4,480 + $620). Taxslayer military You can deduct the $5,100 if you itemize your deductions. Taxslayer military Refund of overpaid interest. Taxslayer military   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. Taxslayer military Generally, you must include the refund in income in the year you receive it. Taxslayer military See Refund of home mortgage interest , earlier, under Home Mortgage Interest. Taxslayer military More than one borrower. Taxslayer military   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. Taxslayer military Show how much of the interest each of you paid, and give the name and address of the person who received the form. Taxslayer military Deduct your share of the interest on Schedule A (Form 1040), line 11, and write “See attached” to the right of that line. Taxslayer military 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. Taxslayer military Mortgage insurance premiums you paid or accrued on any mortgage insurance contract issued before January 1, 2007, are not deductible as an itemized deduction. Taxslayer military 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). Taxslayer military Prepaid mortgage insurance premiums. Taxslayer military   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. Taxslayer military The premiums are treated as paid in the year to which they were allocated. Taxslayer military If the mortgage is satisfied before its term, no deduction is allowed for the unamortized balance. Taxslayer military See Publication 936 for details. Taxslayer military Exception for certain mortgage insurance. Taxslayer military   The allocation rules, explained above, do not apply to qualified mortgage insurance provided by the Department of Veterans Affairs or Rural Housing Service. Taxslayer military 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. Taxslayer military It also must be secured by that home. Taxslayer military 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. Taxslayer military Home acquisition debt limit. Taxslayer military   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). Taxslayer military Discharges of qualified principal residence indebtedness. Taxslayer military   You can exclude from gross income any discharges of qualified principal residence indebtedness made after 2006 and before 2014. Taxslayer military You must reduce the basis of your principal residence (but not below zero) by the amount you exclude. Taxslayer military Principal residence. Taxslayer military   Your principal residence is the home where you ordinarily live most of the time. Taxslayer military You can have only one principal residence at any one time. Taxslayer military Qualified principal residence indebtedness. Taxslayer military   This is a mortgage that you took out to buy, build, or substantially improve your principal residence and that is secured by that residence. Taxslayer military 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. Taxslayer military   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. Taxslayer military Additional debt incurred to substantially improve your principal residence is also qualified principal residence indebtedness. Taxslayer military Amount you can exclude. Taxslayer military   You can only exclude debt discharged after 2006 and before 2014. Taxslayer military The most you can exclude is $2 million ($1 million if married filing separately). Taxslayer military 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. Taxslayer military Ordering rule. Taxslayer military   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. Taxslayer military Qualified Home This means your main home or your second home. Taxslayer military A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities. Taxslayer military Main home. Taxslayer military   You can have only one main home at any one time. Taxslayer military This is the home where you ordinarily live most of the time. Taxslayer military Second home and other special situations. Taxslayer military   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. Taxslayer military 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. Taxslayer military 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. Taxslayer military If your AGI is more than $109,000 ($54,500 if married filing separately), you cannot deduct your mortgage insurance premiums. Taxslayer military Form 1098. Taxslayer military   The amount of mortgage insurance premiums you paid during 2013 should be reported in box 4. Taxslayer military See Form 1098, Mortgage Interest Statement in Publication 936. Taxslayer military Mortgage Interest Credit The mortgage interest credit is intended to help lower-income individuals afford home ownership. Taxslayer military If you qualify, you can claim the credit on Form 8396 each year for part of the home mortgage interest you pay. Taxslayer military Who qualifies. Taxslayer military   You may be eligible for the credit if you were issued a qualified Mortgage Credit Certificate (MCC) from your state or local government. Taxslayer military Generally, an MCC is issued only in connection with a new mortgage for the purchase of your main home. Taxslayer military The MCC will show the certificate credit rate you will use to figure your credit. Taxslayer military It also will show the certified indebtedness amount. Taxslayer military Only the interest on that amount qualifies for the credit. Taxslayer military See Figuring the Credit , later. Taxslayer military You must contact the appropriate government agency about getting an MCC before you get a mortgage and buy your home. Taxslayer military Contact your state or local housing finance agency for information about the availability of MCCs in your area. Taxslayer military How to claim the credit. Taxslayer military   To claim the credit, complete Form 8396 and attach it to your Form 1040 or Form 1040NR, U. Taxslayer military S. Taxslayer military Nonresident Alien Income Tax Return. Taxslayer military 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. Taxslayer military Reducing your home mortgage interest deduction. Taxslayer military   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. Taxslayer military You must do this even if part of that amount is to be carried forward to 2014. Taxslayer military Selling your home. Taxslayer military   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. Taxslayer military For additional information, see Recapturing (Paying Back) a Federal Mortgage Subsidy, in Publication 523. Taxslayer military Figuring the Credit Figure your credit on Form 8396. Taxslayer military Mortgage not more than certified indebtedness. Taxslayer military   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. Taxslayer military Mortgage more than certified indebtedness. Taxslayer military   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. Taxslayer military 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. Taxslayer military 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. Taxslayer military Example. Taxslayer military Emily bought a home this year. Taxslayer military Her mortgage loan is $125,000. Taxslayer military The certified indebtedness amount on her MCC is $100,000. Taxslayer military She paid $7,500 interest this year. Taxslayer military Emily figures the interest to enter on Form 8396, line 1, as follows:   $100,000 = 80% (. Taxslayer military 80)       $125,000       $7,500 x . Taxslayer military 80 = $6,000   Emily enters $6,000 on Form 8396, line 1. Taxslayer military In each later year, she will figure her credit using only 80% of the interest she pays for that year. Taxslayer military Limits Two limits may apply to your credit. Taxslayer military A limit based on the credit rate, and A limit based on your tax. Taxslayer military Limit based on credit rate. Taxslayer military   If the certificate credit rate is higher than 20%, the credit you are allowed cannot be more than $2,000. Taxslayer military Limit based on tax. Taxslayer military   After applying the limit based on the credit rate, your credit generally cannot be more than your tax liability. Taxslayer military See the Credit Limit Worksheet in the Form 8396 instructions to calculate the limit based on tax. Taxslayer military 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. Taxslayer military Example. Taxslayer military John and his brother, George, were issued an MCC. Taxslayer military They used it to get a mortgage on their main home. Taxslayer military John has a 60% ownership interest in the home, and George has a 40% ownership interest in the home. Taxslayer military John paid $5,400 mortgage interest this year and George paid $3,600. Taxslayer military The MCC shows a credit rate of 25% and a certified indebtedness amount of $130,000. Taxslayer military The loan amount (mortgage) on their home is $120,000. Taxslayer military The credit is limited to $2,000 because the credit rate is more than 20%. Taxslayer military 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. Taxslayer military His credit is limited to $1,200 ($2,000 × 60%). Taxslayer military 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. Taxslayer military His credit is limited to $800 ($2,000 × 40%). Taxslayer military 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. Taxslayer military Example. Taxslayer military You receive a mortgage credit certificate from State X. Taxslayer military This year, your regular tax liability is $1,100, you owe no alternative minimum tax, and your mortgage interest credit is $1,700. Taxslayer military You claim no other credits. Taxslayer military Your unused mortgage interest credit for this year is $600 ($1,700 − $1,100). Taxslayer military You can carry forward this amount to the next 3 years or until used, whichever comes first. Taxslayer military Credit rate more than 20%. Taxslayer military   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). Taxslayer military Example. Taxslayer military In the earlier example under Dividing the Credit , John and George used the entire $2,000 credit. Taxslayer military 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. Taxslayer military 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. Taxslayer military The amount of credit you can claim on the new loan may change. Taxslayer military Table 2 below summarizes how to figure your credit if you refinance your original mortgage loan. Taxslayer military Table 2. Taxslayer military Effect of Refinancing on Your Credit IF you get a new (reissued) MCC and the amount of your new mortgage is . Taxslayer military . Taxslayer military . Taxslayer military THEN the interest you claim on Form 8396, line 1, is* . Taxslayer military . Taxslayer military . Taxslayer military smaller than or equal to the certified indebtedness amount on the new MCC all the interest paid during the year on your new mortgage. Taxslayer military larger than the certified indebtedness amount on the new MCC interest paid during the year on your new mortgage multiplied by the following fraction. Taxslayer military         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. Taxslayer military  See New MCC cannot increase your credit above. Taxslayer military An issuer may reissue an MCC after you refinance your mortgage. Taxslayer military 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. Taxslayer military Year of refinancing. Taxslayer military   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. Taxslayer military   If your new MCC has a credit rate different from the rate on the old MCC, you must attach a statement to Form 8396. Taxslayer military 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. Taxslayer military It must show a separate calculation for the part of the year when the new MCC was in effect. Taxslayer military 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. Taxslayer military New MCC cannot increase your credit. Taxslayer military   The credit that you claim with your new MCC cannot be more than the credit that you could have claimed with your old MCC. Taxslayer military   In most cases, the agency that issues your new MCC will make sure that it does not increase your credit. Taxslayer military However, if either your old loan or your new loan has a variable (adjustable) interest rate, you will need to check this yourself. Taxslayer military In that case, you will need to know the amount of the credit you could have claimed using the old MCC. Taxslayer military   There are two methods for figuring the credit you could have claimed. Taxslayer military Under one method, you figure the actual credit that would have been allowed. Taxslayer military This means you use the credit rate on the old MCC and the interest you would have paid on the old loan. Taxslayer military   If your old loan was a variable rate mortgage, you can use another method to determine the credit that you could have claimed. Taxslayer military 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. Taxslayer military 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. Taxslayer military The principal of the hypothetical mortgage is the remaining outstanding balance of the certified mortgage indebtedness shown on the old MCC. Taxslayer military    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. Taxslayer military    As part of your tax records, you should keep your old MCC and the schedule of payments for your old mortgage. Taxslayer military 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. Taxslayer military While you own your home, you may add certain items to your basis. Taxslayer military You may subtract certain other items from your basis. Taxslayer military These items are called adjustments to basis and are explained later under Adjusted Basis . Taxslayer military 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. Taxslayer military You also must keep records of the events that affect basis or adjusted basis. Taxslayer military See Keeping Records , below. Taxslayer military Figuring Your Basis How you figure your basis depends on how you acquire your home. Taxslayer military If you buy or build your home, your cost is your basis. Taxslayer military 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. Taxslayer military If you inherit your home from a decedent, different rules apply depending on the date of the decedent's death. Taxslayer military Each of these topics is discussed later. Taxslayer military Property transferred from a spouse. Taxslayer military   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. Taxslayer military Publication 504, Divorced or Separated Individuals, fully discusses transfers between spouses. Taxslayer military 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. Taxslayer military The cost of your home includes most settlement or closing costs you paid when you bought the home. Taxslayer military If you built your home, your cost includes most closing costs paid when you bought the land or settled on your mortgage. Taxslayer military See Settlement or closing costs , later. Taxslayer military 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. Taxslayer military Purchase. Taxslayer military   The basis of a home you bought is the amount you paid for it. Taxslayer military This usually includes your down payment and any debt you assumed. Taxslayer military The basis of a cooperative apartment is the amount you paid for your shares in the corporation that owns or controls the property. Taxslayer military This amount includes any purchase commissions or other costs of acquiring the shares. Taxslayer military Construction. Taxslayer military   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. Taxslayer military 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. Taxslayer military If you built all or part of your home yourself, your basis is the total amount it cost you to build it. Taxslayer military You cannot include in basis the value of your own labor or any other labor for which you did not pay. Taxslayer military Real estate taxes. Taxslayer military   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. Taxslayer military 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. Taxslayer military   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. Taxslayer military You cannot deduct them as taxes paid. Taxslayer military   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. Taxslayer military Do not include those taxes in your basis. Taxslayer military If you did not reimburse the seller, you must reduce your basis by the amount of those taxes. Taxslayer military Example 1. Taxslayer military You bought your home on September 1. Taxslayer military The property tax year in your area is the calendar year, and the tax is due on August 15. Taxslayer military 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. Taxslayer military You did not reimburse the seller for your share of the real estate taxes from September 1 through December 31. Taxslayer military You must reduce the basis of your home by the $426 [(122 ÷ 365) × $1,275] the seller paid for you. Taxslayer military You can deduct your $426 share of real estate taxes on your return for the year you purchased your home. Taxslayer military Example 2. Taxslayer military You bought your home on May 3, 2013. Taxslayer military The property tax year in your area is the calendar year. Taxslayer military The taxes for the previous year are assessed on January 2 and are due on May 31 and November 30. Taxslayer military Under state law, the taxes become a lien on May 31. Taxslayer military You agreed to pay all taxes due after the date of sale. Taxslayer military The taxes due in 2013 for 2012 were $1,375. Taxslayer military The taxes due in 2014 for 2013 will be $1,425. Taxslayer military 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. Taxslayer military Instead, you add the $1,375 to the cost (basis) of your home. Taxslayer military 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. Taxslayer military You add the remaining $476 ($1,425 − $949) of taxes paid in 2014 to the cost (basis) of your home. Taxslayer military Settlement or closing costs. Taxslayer military   If you bought your home, you probably paid settlement or closing costs in addition to the contract price. Taxslayer military These costs are divided between you and the seller according to the sales contract, local custom, or understanding of the parties. Taxslayer military If you built your home, you probably paid these costs when you bought the land or settled on your mortgage. Taxslayer military   The only settlement or closing costs you can deduct are home mortgage interest and certain real estate taxes. Taxslayer military You deduct them in the year you buy your home if you itemize your deductions. Taxslayer military You can add certain other settlement or closing costs to the basis of your home. Taxslayer military Items added to basis. Taxslayer military   You can include in your basis the settlement fees and closing costs you paid for buying your home. Taxslayer military A fee is for buying the home if you would have had to pay it even if you paid cash for the home. Taxslayer military   The following are some of the settlement fees and closing costs that you can include in the original basis of your home. Taxslayer military Abstract fees (abstract of title fees). Taxslayer military Charges for installing utility services. Taxslayer military Legal fees (including fees for the title search and preparation of the sales contract and deed). Taxslayer military Recording fees. Taxslayer military Surveys. Taxslayer military Transfer or stamp taxes. Taxslayer military Owner's title insurance. Taxslayer military 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. Taxslayer military   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. Taxslayer military Items not added to basis and not deductible. Taxslayer military   Here are some settlement and closing costs that you cannot deduct or add to your basis. Taxslayer military Fire insurance premiums. Taxslayer military Charges for using utilities or other services related to occupancy of the home before closing. Taxslayer military Rent for occupying the home before closing. Taxslayer military 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. Taxslayer military Points paid by seller. Taxslayer military   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. Taxslayer military   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. Taxslayer military See Points , earlier, for the rules on deducting points. Taxslayer military 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. Taxslayer military Fair market value. Taxslayer military   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. Taxslayer military Donor's adjusted basis is more than FMV. Taxslayer military   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. Taxslayer military Disposition basis. Taxslayer military   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. Taxslayer military Your basis for figuring a gain is the same as the donor's adjusted basis. Taxslayer military Your basis for figuring a loss is the FMV when you received the gift. Taxslayer military 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. Taxslayer military However, if using the FMV results in a gain, then you neither have a gain nor a loss. Taxslayer military Example 1. Taxslayer military Andrew received a house as a gift from Ishmael (the donor). Taxslayer military At the time of the gift, the home had an FMV of $80,000. Taxslayer military Ishmael's adjusted basis was $100,000. Taxslayer military After he received the house, no events occurred to increase or decrease the basis. Taxslayer military 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. Taxslayer military Example 2. Taxslayer military Same facts as Example 1 , except this time Andrew sells the house for $70,000. Taxslayer military 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. Taxslayer military Example 3. Taxslayer military Same facts as Example 1 , except this time Andrew sells the house for $90,000. Taxslayer military Initially, he figures the gain using Ishmael's adjusted basis ($100,000), which results in a loss of $10,000. Taxslayer military Since it is a loss, Andrew must now recalculate the loss using the FMV ($80,000), which results in a gain of $10,000. Taxslayer military So in this situation, Andrew will neither have a gain nor a loss. Taxslayer military Donor's adjusted basis equal to or less than the FMV. Taxslayer military   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. Taxslayer military Part of federal gift tax due to net increase in value. Taxslayer military   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. Taxslayer military 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. Taxslayer military The net increase in the value of the home is its FMV minus the adjusted basis of the donor. Taxslayer military Publication 551 gives more information, including examples, on figuring your basis when you receive property as a gift. Taxslayer military 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. Taxslayer military If an estate tax return was filed, your basis is generally the value of the home listed on the estate tax return. Taxslayer military 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. Taxslayer military Publication 551 and Publication 559, Survivors, Executors, and Administrators, have more information on the basis of inherited property. Taxslayer military 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. Taxslayer military Adjusted Basis While you own your home, various events may take place that can change the original basis of your home. Taxslayer military These events can increase or decrease your original basis. Taxslayer military The result is called adjusted basis. Taxslayer military See Table 3, on this page, for a list of some of the items that can adjust your basis. Taxslayer military Table 3. Taxslayer military Adjusted Basis This table lists examples of some items that generally will increase or decrease your basis in your home. Taxslayer military It is not intended to be all-inclusive. Taxslayer military 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. Taxslayer military   An improvement materially adds to the value of your home, considerably prolongs its useful life, or adapts it to new uses. Taxslayer military You must add the cost of any improvements to the basis of your home. Taxslayer military You cannot deduct these costs. Taxslayer military   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. Taxslayer military Amount added to basis. Taxslayer military   The amount you add to your basis for improvements is your actual cost. Taxslayer military This includes all costs for material and labor, except your own labor, and all expenses related to the improvement. Taxslayer military 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. Taxslayer military   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. Taxslayer military These assessments are discussed earlier under Real Estate Taxes . Taxslayer military Improvements no longer part of home. Taxslayer military    Your home's adjusted basis does not include the cost of any improvements that are replaced and are no longer part of the home. Taxslayer military Example. Taxslayer military You put wall-to-wall carpeting in your home 15 years ago. Taxslayer military Later, you replaced that carpeting with new wall-to-wall carpeting. Taxslayer military The cost of the old carpeting you replaced is no longer part of your home's adjusted basis. Taxslayer military Repairs versus improvements. Taxslayer military   A repair keeps your home in an ordinary, efficient operating condition. Taxslayer military It does not add to the value of your home or prolong its life. Taxslayer military Repairs include repainting your home inside or outside, fixing your gutters or floors, fixing leaks or plastering, and replacing broken window panes. Taxslayer military You cannot deduct repair costs and generally cannot add them to the basis of your home. Taxslayer military   However, repairs that are done as part of an extensive remodeling or restoration of your home are considered improvements. Taxslayer military You add them to the basis of your home. Taxslayer military Records to keep. Taxslayer military   You can use Table 4 (at the end of the publication) as a guide to help you keep track of improvements to your home. Taxslayer military Also see Keeping Records , below. Taxslayer military Energy conservation subsidy. Taxslayer military   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. Taxslayer military You must reduce the basis of your home by that value. Taxslayer military   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. Taxslayer military 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. Taxslayer military 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. Taxslayer military You should keep any receipts, canceled checks, and similar evidence for improvements or other additions to the basis. Taxslayer military In addition, you should keep track of any decreases to the basis such as those listed in Table 3, earlier. Taxslayer military How to keep records. Taxslayer military   How you keep records is up to you, but they must be clear and accurate and must be available to the IRS. Taxslayer military How long to keep records. Taxslayer military   You must keep your records for as long as they are important for meeting any provision of the federal tax law. Taxslayer military   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. Taxslayer military (A period of limitations is the period of time after which no legal action can be brought. Taxslayer military ) For assessment of tax you owe, this is generally 3 years from the date you filed the return. Taxslayer military 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. Taxslayer military Returns filed before the due date are treated as filed on the due date. Taxslayer military   You may need to keep records relating to the basis of property (discussed earlier) for longer than the period of limitations. Taxslayer military Keep those records as long as they are important in figuring the basis of the original or replacement property. Taxslayer military 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. Taxslayer military Table 4. Taxslayer military Record of Home Improvements Keep this for your records. Taxslayer military Also, keep receipts or other proof of improvements. Taxslayer military Remove from this record any improvements that are no longer part of your main home. Taxslayer military 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. Taxslayer military (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