Every week, Mansion Global poses a tax question to real estate tax attorneys. Here is this week’s question.
While going through the process of researching and purchasing a new property, what are possible less-obvious write-offs I should consider on my tax return?
There are four areas you should consider, including points, prepaid interest, prorated real estate tax and tax credits.
"There are a lot of overlooked deductions" beyond mortgage interest and property taxes, says Michael Gillen, director of the Tax Accounting Group at law firm Duane Morris in Philadelphia.
Points are also known as loan origination fees or loan charges and are paid to finance the purchase of a primary or secondary residence. Each point represents 1% of the loan amount. For example, 3 points paid on a $1 million mortgage is $30,000 to the lender.
"Those points are deductible, provided the mortgage is secured by the home," Mr. Gillen says, meaning the house is offered as collateral in the event of default.
But there’s a caveat: Points are deductible in the year they’re paid for the primary home only. Points paid on the purchase of a second home are deducted over the life of the loan.
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Then there’s prepaid interest.
"Lenders usually want borrowers to remit mortgage payment on the first of each month. If you close on the 10th, the lender wants you to prepay 20 days of interest," Mr. Gillen says.
This interest is deductible, though generally for one month only, says G. Scott Haislet, a certified specialist in taxation law and certified public accountant in private practice in Lafayette, California. "You can’t pay six months ahead, because you don’t get to deduct interest until it accrues," he says.
Find out first whether you can deduct the interest, Mr. Haislet advises. The federal home acquisition indebtedness rule allows up to $1 million aggregate in mortgage interest, he notes. Anything beyond that doesn’t qualify. "Not all interest is deductible," he says.
Prorated real estate tax is another area to consider writing off.
Say you buy a home in August and the seller had paid the property taxes of $50,000 in February. You’d have to reimburse half, $25,000, when you close the home sale. "The $25,000 is a tax write-off that people forget to claim," Mr. Gillen says.
"A good year-end tax planning tool" in some states, including California, is to pay the second half of your property taxes this year rather than next year, Mr. Haislet says. This enables you to get the tax deduction this year, if you’re not subject to the Alternative Minimum Tax.
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Finally, there are tax credits.
"Tax credits are a super deduction because they’re dollar-for-dollar tax savings," Mr. Gillen says.
The Residential Energy Efficient Property Credit permits a 30% tax credit on the installation of qualified solar electric systems, solar water heaters, fuel cell property, small wind energy property and geothermal heat pumps
Installation of a $100,000 wind turbine system on your lakefront property would result in " a $30,000 tax refund from the IRS," he says.
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