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Free Tax E File 2012

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Free Tax E File 2012

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The Free Tax E File 2012

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