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H&r Block Tax Software

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H&r block tax software Publication 551 - Introductory Material Table of Contents What's New Reminder IntroductionOrdering forms and publications. H&r block tax software Tax questions. H&r block tax software Useful Items - You may want to see: What's New Property acquired from a decedent who died in 2010. H&r block tax software  Property acquired from a decedent dying in 2010 will no longer have an automatic increase in basis. H&r block tax software See Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, for details. H&r block tax software Reminder Photographs of missing children. H&r block tax software  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. H&r block tax software Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. H&r block tax software You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. H&r block tax software Introduction Basis is the amount of your investment in property for tax purposes. H&r block tax software Use the basis of property to figure depreciation, amortization, depletion, and casualty losses. H&r block tax software Also use it to figure gain or loss on the sale or other disposition of property. H&r block tax software You must keep accurate records of all items that affect the basis of property so you can make these computations. H&r block tax software This publication is divided into the following sections. H&r block tax software Cost Basis Adjusted Basis Basis Other Than Cost The basis of property you buy is usually its cost. H&r block tax software You may also have to capitalize (add to basis) certain other costs related to buying or producing the property. H&r block tax software Your original basis in property is adjusted (increased or decreased) by certain events. H&r block tax software If you make improvements to the property, increase your basis. H&r block tax software If you take deductions for depreciation or casualty losses, reduce your basis. H&r block tax software You cannot determine your basis in some assets by cost. H&r block tax software This includes property you receive as a gift or inheritance. H&r block tax software It also applies to property received in an involuntary conversion and certain other circumstances. H&r block tax software Comments and suggestions. H&r block tax software   We welcome your comments about this publication and your suggestions for future editions. H&r block tax software   You can write to us at the following address: Internal Revenue Service Business Forms and Publications Branch SE:W:CAR:MP:T:B 1111 Constitution Ave. H&r block tax software NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. H&r block tax software Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. H&r block tax software   You can email us at taxforms@irs. H&r block tax software gov. H&r block tax software Please put “Publications Comment” on the subject line. H&r block tax software You can also send us comments from www. H&r block tax software irs. H&r block tax software gov/formspubs/, select “Comment on Tax Forms and Publications” under “Information about. H&r block tax software ”   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. H&r block tax software Ordering forms and publications. H&r block tax software   Visit www. H&r block tax software irs. H&r block tax software gov/formspubs to download forms and publications, call 1-800-829-3676, or write to the address below and receive a response within 10 business days after your request is received. H&r block tax software  Internal Revenue Service  1201 N. H&r block tax software Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. H&r block tax software   If you have a tax question, visit IRS. H&r block tax software gov or call 1-800-829-1040. H&r block tax software We cannot answer tax questions sent to either of the above addresses. H&r block tax software Useful Items - You may want to see: Publication 463 Travel, Entertainment, Gift, and Car Expenses 523 Selling Your Home 525 Taxable and Nontaxable Income 527 Residential Rental Property 530 Tax Information for First-Time Homeowners 535 Business Expenses 537 Installment Sales 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 559 Survivors, Executors, and Administrators 587 Business Use of Your Home 946 How To Depreciate Property Form (and Instructions) 706 United States Estate (and Generation-Skipping Transfer) Tax Return 706-A United States Additional Estate Tax Return 8594 Asset Acquisition Statement See How To Get Tax Help near the end of this publication for information about getting publications and forms. H&r block tax software Prev  Up  Next   Home   More Online Publications
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The H&r Block Tax Software

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