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

Free electronic tax filing Index A Assistance (see Tax help) C Carryback period, When To Use an NOL Carryback, waiving, Waiving the Carryback Period Carryforward period, When To Use an NOL Carryover from 2012 to 2013 Estates and trusts, Estates and trusts. Free electronic tax filing Worksheet instructions, Worksheet Instructions Claiming an NOL deduction, How To Claim an NOL Deduction D Deducting a carryback, Deducting a Carryback Deducting a carryforward, Deducting a Carryforward Domestic production activities deduction, Domestic production activities deduction (line 23). Free electronic tax filing , Modified taxable income. Free electronic tax filing E Eligible loss, Eligible loss. Free electronic tax filing F Farming business, Farming business. Free electronic tax filing Farming loss, Farming loss. Free electronic tax filing Figuring an NOL Capital losses, Adjustments for capital losses (lines 19–22). Free electronic tax filing Carryover, How To Figure an NOL Carryover Form 1045, Schedule A, Form 1045, Schedule A. Free electronic tax filing NOL deduction, NOLs from other years (line 24). Free electronic tax filing Nonbusiness deductions, Nonbusiness deductions (line 6). Free electronic tax filing Nonbusiness income, Nonbusiness income (line 7). Free electronic tax filing Filing status, change in, Change in Filing Status Form 1045, Schedule A, Form 1045, Schedule A. Free electronic tax filing Form 1045, Schedule B, Form 1045, Schedule B. Free electronic tax filing Forms and schedules Form 1040X, Form 1040X. Free electronic tax filing Form 1045, Form 1045. Free electronic tax filing Form 1045, Schedule A, Form 1045, Schedule A. Free electronic tax filing Form 1045, Schedule B, Form 1045, Schedule B. Free electronic tax filing Free tax services, Free help with your tax return. Free electronic tax filing Future developments, Reminders H Help (see Tax help) How to carry an NOL back or forward, How To Carry an NOL Back or Forward How to figure an NOL, How To Figure an NOL I Illustrated forms and schedules Form 1045, Illustrated Form 1045 Form 1045, Schedule A, Illustrated Form 1045, Schedule A Form 1045, Schedule B, Form 1045, Schedule B. Free electronic tax filing M Marital status, change in, Change in Marital Status Missing children, photographs of, Reminders Modified taxable income, Modified taxable income. Free electronic tax filing N NOL resulting in no taxable income, NOL resulting in no taxable income. Free electronic tax filing NOL year, Introduction, NOL year. Free electronic tax filing P Publications (see Tax help) Q Qualified disaster loss, Qualified disaster loss. Free electronic tax filing Qualified small business, Qualified small business. Free electronic tax filing R Refiguring tax, Refiguring your tax. Free electronic tax filing S Specified liability loss, Specified liability loss. Free electronic tax filing Steps in figuring NOL, NOL Steps T Tax help, How To Get Tax Help W Waiving the 10-year carryback, Waiving the 10-year carryback. Free electronic tax filing Waiving the 5-year carryback, Waiving the 5-year carryback. Free electronic tax filing Waiving the carryback period, Waiving the Carryback Period When to use an NOL, When To Use an NOL Worksheet (Continued), Carryover from 2012 to 2013, Prev  Up     Home   More Online Publications