Tax benefits of buying and owning a home

Tax Benefits of Buying a Home This lecture will cover three issues Mortgage interest deduction First time home buyer’s tax credit Loan Modification

Deduction vs. Credit Credits are better Deduction reduces your taxable income Credit reduces your tax bill Ex. If your AGI is 100K and you have 10K in deductions, then your AGI will be 90K your tax bill will be $19,185 If your AGI is 100K and you have 10K in credits, then your AGI will be 100k tax bill will be $11,971 (tax on 100K minus 10K for the credit.

Mortgage Interest Deduction Rule - one may deduct ALL of your home mortgage interest if you are legally liable for the loan, you itemize deductions on IRS form 1040 / Schedule A, there is a true debtor-creditor between you and the lender, The mortgage is a ‘secured debt’ on a ‘qualified home’ Reference Publication 936 from www.irs.gov IRC Section 56(e)

Secured Debt This is debt upon which you sign an instrument (mortgage, deed of trust, or land contract) that makes ownership in a qualified home security for payment of the debt Provides your house as collateral for the debt (to protect the interest of the lender), and Must be recorded.

Qualified Home Includes your main home or your second home (must use it as a home 14 days or 10% more than the number of days you rent) Debt must be secured to the qualified home Reference pg. 2 of Publication 936 for details IRC Section 163(h), 121, 280A(d)(1)

Most of your deduction will come in the first part of the life of the loan 16,399.14 345.31 1,358.06 295,958.73 1-Apr-10 12 15,041.07 343.73 1,359.64 296,304.04 1-Mar-10 11 13,681.44 342.16 1,361.20 296,647.77 1-Feb-10 10 12,320.24 340.6 1,362.76 296,989.93 1-Jan-10 9 10,957.47 339.05 1,364.32 297,330.53 1-Dec-09 8 9,593.15 337.5 1,365.87 297,669.58 1-Nov-09 7 8,227.29 335.96 1,367.41 298,007.08 1-Oct-09 6 6,859.88 334.43 1,368.94 298,343.05 1-Sep-09 5 5,490.94 332.9 1,370.46 298,677.47 1-Aug-09 4 4,120.48 331.38 1,371.98 299,010.38 1-Jul-09 3 2,748.49 329.87 1,373.49 299,341.76 1-Jun-09 2 1,375.00 328.37 1,375.00 299,671.63 1-May-09 1 Total Interest Principal Interest Loan Balance Date Pmt #

What this means for you Buying a house is like renting with a really large down payment and provides for many deductions This deduction comes off the top of your income, so every dollar of your write off is a 35% savings Ex: If you are in the 35% tax bracket and you have a $2K deduction, you will save ($2K * 35% = ) $750 Points (percentage paid up front to reduce interest rates, so broker and origination points may be deducted over the life of the loan)* *strategy for loan structure

http://taxes.about.com/od/2009taxes/qt/2009_tax_rates.htm 10% on income between $0 and $8,350 15% on the income between $8,350 and $33,950; plus $835 25% on the income between $33,950 and $82,250; plus $4,675 28% on the income between $82,250 and $171,550; plus $16,750 33% on the income between $171,550 and $372,950; plus $41,754 35% on the income over $372,950; plus $108,216 You will be taxed… (single tax bracket)

How to Deduct the Credit Your lender or loan service company will send you a Form 1098 Enter data on the Schedule A: Itemize your deductions Enter computed amount on 1040 line 40 Must be total of over $5,450 which is the standard deduction

Reverse mortgages You may write off the interest when you move sell your home reach the end of a pre selected loan period or die

First time home buyer’s tax credit FIRST-TIME HOMEBUYER TAX CREDIT As Modified in the American Recovery and Reinvestment Act Majo r Modifications Italicized Febr uary 2009 EFFECTIVE FOR PURCHASES ON OR AFTER JANUARY 1, 2009 AND BEFORE DECEMBER 1, 2009 File Form 5405 from the irs.gov website

Elements of the Credit Lesser of 10 percent of cost of home or $7500 Maximum cred it amount increased to $8000 you DO NOT have to pay it back. Eligible Pro perty Any single family residence (including condos, co-ops, townhouses) that will be used as a principal residence. All principal residences eligible. Refundable - any unused amount of tax credit refunded to purchaser. - if you do not use it all, you will received a check for the unused amount

Elements of the Credit (cont.) Income Limit Full amount of credit available for individuals with adjusted gross income of no more than $75,000 ($150,000 on a joint return). Phases out above those caps ($95,000 and $170,000). Ex: If are single and you make $80K a year then you will you have made $5K over than $75K, so, put $5K in the numerator, $20K in the denominator,which equals 25% of the credit that you cannot take (double for married people)

Elements of the Credit (cont.) First-time Homebuyer Only (3 year rule) purchaser (and purchaser’s spouse) may not have owned a principal residence (lived in for more than 50% of the year) in 3 years previous to purchase. Recapture If home is sold within three years of purchase, entire amount of credit is recaptured on sale. Applies only to homes purchased in 2009. Effective Date Purchases on or after April 9, 2008 and before January 1, 2009. Repayment to begin for 2010 tax year. All revisions are effective as of January 1, 2009 January 1, 2009

Down payment? You cannot use it as part of the down payment, Strategy, you may choose to withhold less taxes in the year so that you have more available cash for the purchase.

Loan Modifications Background Loan mods can be done by the borrower Over 100 loan modification popped up in the greater LA area alone They charge $1K to $5K per modification, some up front with no guarantees This is a great opportunity for fraud, an expanding area of litigation, and to worsen the position of an already troubled borrower

What is a loan modification? It is a negotiation between a borrower and a lender to modify the an existing debt instrument so that the borrower can meet his financial obligation instead of going into foreclosure

Making homes affordable program Housing Recovery Act 2009 Intends to reach / prevent 3-4 million at risk borrowers Allocated $75 billion to the program Designed to help before payments are late http://www.treas.gov/press/releases/reports/housing_fact_sheet.pdf

Do I qualify? There is an online resource that can answer the these questions for you: http://www.makinghomeaffordable.gov/modification_eligibility.html www.financialstability.gov

Do I qualify? (cont.) Lender will have to first reduce monthly payment on mortgages to specified affordability level (38% front end ration) The program will match payments from 38% to 31% The new interest rate is intact for 5 years, then it may adjust up to 1% a year until it reaches the original loan amount Rates can go down to as low as 2%, term can be extended up to 40 years

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Tax benefits of buying and owning a home

by Dan Heilbrun on Jan 09, 2011

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Tax benefits of buying and owning a home — Presentation Transcript