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One of the first steps in a good outcome is knowing a little bit about what you’re about to undertake. By being aware of some of the areas regarding homes that may not come up every year in a tax return, you’ll be able to point them out to your tax professional or seek more information from IRS.gov.
Look through this list of items for things that could affect your tax return. Even if you have relied on the same tax professional for years to look out for your best interests, they need to be aware that there could be something different in this year’s return.
If you bought a home for a principal residence last year, check your closing statement and identify any points or pre-paid interest that you or the seller paid based on the mortgage you received. These can be deducted on your Schedule A as qualified home interest if you itemize your deductions. See Home Mortgage Interest Deduction | IRS Publication 936 .
Keep track of all money you spend on your home that might be considered a capital improvement. Get in the habit of putting receipts for money spent on your home that is not the house payment or utility bills. Repairs are not tax deductible but improvements, even small ones, can be added to the basis of your home which can lower the gain when the home is sold. Years from now, your tax preparer can sift through them and determine whether they’re capital improvements or maintenance. See Increases to Basis | IRS Publication 523 Selling Your Home .
By making additional principal contributions with your mortgage payment, you’ll save interest, build equity and shorten the term of a fixed-rate mortgage. See Equity Accelerator.
If you sold a home last year, the payoff on your old mortgage included interest from the last payment you made to the date of the payoff. That interest is tax deductible. You may need a breakdown of the payoff to the mortgage company; you should be able to get that from your closing officer.
If you refinanced your home, unlike a home purchase, points paid to refinance are not deductible as interest in the year paid; they must spread ratably over the life of the mortgage. See Home Mortgage Interest Deduction | IRS Publication 936 .
For homeowners who have lost a spouse, there is an exception regarding the exclusion on the sale of a principal residence. If the surviving spouse concludes a sale of the home within two years of the death of their spouse, they may exclude up to $500,000, instead of $250,000 for single taxpayers, of gain provided ownership and use tests are met prior to death.
The two-year period begins on the date of death and ends two years after that date. See Sale of Main Home by Surviving Spouse | IRS Publication 523 Selling Your Home .
There could be significant tax consequences to a person selling a home that was received as a gift as compared to receiving the home through inheritance. With a gift, the basis of the donor becomes the basis of the donee. With inheritance, the heir usually gets a stepped-up basis and avoids potential unrecognized gain. See Home Received as Inheritance | IRS Publication 523 Selling Your Home .
This is meant for information purposes only and advice from a qualified tax professional should be sought to find out about your individual situation.
Another Type of Financing Concession
Price, condition and terms are factors that any owner must consider when marketing their home. Price is usually the easiest to adjust to compensate for shortcomings in location or condition of the home. Improving the condition of the property is more time consuming but updates to kitchens, baths and other things can appeal to a buyer.
One of the most overlooked marketing factors are terms which are also referred to as financing concessions.
Paying part or all a buyer’s closing costs is the most common financing concession. By doing so, the buyer doesn’t need as much cash to get into the home which can be attractive to more buyers.
There is another financing concession that is not used very often in today’s market but it is still allowed and can increase the marketability of a home. A temporary buy-down of the interest rate makes a lower payment for an initial period.
It is still a fixed-rate mortgage that the buyer must qualify for at the note rate and there is no negative amortization. The seller pre-pays the interest in advance at closing so the buyer has lower payments in the initial period.
Instead of lowering the price of the home, let’s say the seller has decided to offer $12,500 worth of financing concessions that the buyer can apply any way they want. One way might be to get a 2/1 buy-down which means that the first year, the payment would be based on 2% less than the note rate of the mortgage and the second year, it would be 1% less than the note rate. The third through thirtieth years, the payment would be the actual note rate.
On a $500,000 home with a 3.5% down payment at 5% for 30 years, the first year’s mortgage payment would be figured at 3% which would be $555.92 less than normal. The second year’s payment would be figured at 4% and would be $286.63 less than normal. The third through thirtieth years, the payment would be the normal payment of $2590.16.
It would save the buyer $10,110 in interest in the first two years and there would still be $2,389 of the financing concession to apply toward the buyer’s closing costs.
The financing concessions paid by the seller give the buyer lower payments for the first two years and less money needed for the closing cost. An added bonus for the buyer is that the buyer can deduct the pre-paid interest the seller paid as qualified mortgage interest.
Some lenders may tell you that temporary buy downs cannot be done. They’ve been around for over thirty years and can still be done today on FHA, VA and conventional loans. Call (206) 979-9632 if you need a recommendation of a trusted mortgage professional or check out a 2/1 Buydown with your own numbers.
Here is a Seller’s Home Inspection Check List
- Trim all vegetation at least 12 inches away from siding.
- Keep earth 6 inches below / away from siding and all other wood while maintaining a gentle slope away from the structure.
- Remove moss from the roof. Pressure washing can often cause more damage than good. Cleaning solutions and instructions can be found at most home improvement centers.
- Extend downspouts that drain above ground at least 6 feet away from the structure.
- Clean the gutters as even small amounts of debris can clog downspouts.
- Keep trees and branches pruned at least 6 feet away from roof and power lines.
- Check for signs of rodents. Obtain the assistance of a pest control operator to clean and repair any rodent damage.
- Be certain all earth is covered with a 6 mm vapor barrier with 6 inch overlaps
- Remove all cellulose debris large enough to be picked up by a standard garden rake.
- All crawl space vents should be open and screened for proper ventilation.
- Be sure all bathroom exhaust vents are still attached and lead to the exterior of the structure.
- Keep insulation clear of soffit vents.
Furnace, A/C Units and Hot Water Tanks
- Heating and cooling systems should be professionally inspected annually. Be certain you can demonstrate this has been done within the past 12 months.
- Hot water tanks are required to be strapped to the wall to reduce the possibility of tipping.
- Correct slow draining sinks and tubs. Fill sinks then drain while looking for leaks below. Repair all leaks if any.
- Clear storage away from electric panels, hot water tanks, attic and crawl space entry points so that the inspector does not have to make extra trips back that will slow the process.
- Remove clothing from laundry equipment and dishes from the dishwasher. These items will likely be tested by the inspector.
- Keep the house clean and show ready for the inspection. Remember the house probably looked great when the Buyer fell in love with the home and made the offer. Now is not the time to let a messy house cause the Buyer to change their mind.
- Smoke Detectors more than 10 years old should be replaced.
- Washington State law requires Carbon Monoxide Detectors be installed at least one per floor and within 15 feet of all bedrooms. Detectors more than 5 years old should be replaced.