Real Estate
(Taxes, Mortgage Interest, Points, Other Property Expenses)
This is archived information that pertains only to the 2002 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.
I have a mortgage for my primary residence and a second mortgage for land that I intend to build a home on. Can the interest be deducted for the second mortgage?
Unless you have begun construction of a home on the bare land that you can occupy within 24 months, the land would be considered an investment and the interest you paid on the second mortgage would not qualify as deductible mortgage interest. However, it would constitute investment interest if you itemize your deductions. For more information, refer to Publication 550 (PDF), Investment Income and Expenses, and Publication 936 (PDF), Home Mortgage Interest Deduction.
References: May I deduct my home improvements and repairs to my home?
Home improvements add to the value of your home, prolong its useful life, or adapt it to new uses. Home improvements costs are not deductible. However, you add the cost of improvements to the basis of your property.
Examples of 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, putting on a new roof, or paving your driveway.
For a list of some other examples of improvements, refer to Publication 523 (PDF), Selling Your Home.
Repairs maintain your home in good condition. They are not currently deductible nor do they add to your home's value or prolong its life. You do not add their cost to the basis of your property.
Some examples of repairs include repainting your house inside or outside, fixing your gutters or floors, repairing leaks or plastering and replacing broken window panes.
Exception: The entire job is considered an improvement, however, if items that would otherwise be considered repairs are done as part of an extensive remodeling or restoration of your home. For more information, refer to Publication 523 (PDF); Selling Your Home; and Publication 551 (PDF), Basis of Assets.
References: Is the mortgage interest and property tax on a second residence deductible?
The mortgage interest on a second home which you use as a residence for some portion of the taxable year, is generally deductible if the interest satisfies the same requirements for deductibility as interest on a primary residence. Real estate taxes paid on your primary and second residence are, generally, deductible. Deductible real estate taxes include any state, local, or foreign taxes on real property levied for the general public welfare. Deductible real estate taxes do not include taxes charged for local benefits and improvements that increase the value of the property. For more information, refer to Publication 17 (PDF), Your Federal Income Tax for Individuals; Tax Topic 503, Deductible Taxes; and Publication 530 (PDF), Tax Information for First-Time Home Buyers.
References: What are the rules for mortgage interest on a manufactured home? Can I deduct the interest on the mortgage for the manufactured home if it is on a rented lot? Can I deduct the interest for the manufactured home and for the lot if I buy a lot for the home?
For you to take a home mortgage interest deduction, your debt must be secured by a qualified home. This means your main home or your second home. A home includes a house, condominium, cooperative, mobile home, boat, or similar property that has sleeping, cooking, and toilet facilities.
The mortgage interest on a manufactured home may be deducted if the home is on a rented lot. If you buy a lot and place a manufactured home on it, the interest paid for the lot is also qualifying home mortgage interest, provided the mortgage is secured by the house.
References: 10.1 Captial Gains, Losses/Sale of Home: Property (Basis, Sale of Home, etc.) I sold my home last year. Do I have to report the sale?
Report the sale of your main home on your tax return only if you have a gain and at least part of it is taxable. Report any taxable gain on Form 1040, Schedule D (PDF), Capital Gains and Losses. Form 2119, Sale of Your Home is obsolete beginning in 1998. For more information, refer to Publication 523 (PDF), Selling Your Home.
References: I sold my principal residence this year. What form do I need to file?
If you meet the ownership and use tests, you will generally only need to report the sale of your home if your gain is more than $250,000 ($500,000 if married filing a joint return). This means that during the 5-year period ending on the date of the sale, you must have: - Owned the home for at least 2 years (the ownership test), and
- Lived in the home as your main home for at least 2 years (the use test).
If you owned and lived in the property as your main home for less than 2 years, you may still be able to claim an exclusion in some cases. The maximum amount you can exclude will be reduced. If you are required to report a gain, it is reported on Form 1040, Schedule D (PDF), Capital Gains and Losses.
For additional information on selling your home, refer to Publication 523 (PDF), Selling Your Home.
References: If I sell my home and use the money I receive to pay off the mortgage, do I have to pay taxes on that money?
It is not the money you receive for the sale of your home, but the amount of gain on the sale over your cost, or basis, that determines whether you will have to include any proceeds as taxable income on your return. You may be able to exclude any gain from income up to a limit of $250,000 ($500,000 on a joint return in most cases). If you can exclude all of the gain, you do not need to report the sale on your tax return.
For additional information on selling your home, refer to Publication 523 (PDF), Selling Your Home.
References: If I take the exclusion of capital gain tax on the sale of my old home this year, can I also take the exclusion again if I sell my new home in the future?
With the exception of the 2-year waiting period, there is no limit on the number of times you can exclude the gain on the sale of your principle residence so long as you meet the ownership and use tests.
References: What is the amount of capital gains from the sale of a home that can be excluded if sold in less than the two year waiting period?
If you owned and lived in the property as your main home for less than 2 years, you may still be able to claim an exclusion in some cases. The maximum amount you can exclude will be reduced.
You can claim this reduced exclusion if either of the following is true.
- You did not meet the ownership and use tests on a home you sold due to:
- a change in health
- a change in place of employment
- to the extent provided by regulations, unforeseen circumstances. (see below)
- Your exclusion would have been disallowed because of the rule on selling more than one home in a two year period, except you sold the home due to:
- a change in health
- a change in place of employment
- to the extent provided by regulations, unforeseen circumstances. (see below)
Use the worksheet in Publication 523 (PDF), Selling Your Home, to figure your reduced exclusion.
The IRS has not as yet issued regulations defining unforseen circumstances. You cannot claim an exclusion based on unforeseen circumstances until the IRS issues final regulations or appropriate guidelines.
Refer to Reduced Maximum Exclusion and Special Situations in Publication 523 (PDF), Selling Your Home.
References: I lived in a home as my principal residence for the first 2 of the last 5 years. For the last 3 years, the home was a rental property before selling it. Can I still avoid the capital gains tax and, if so, how should I deal with the depreciation I took while it was rented out?
If, during the 5-year period ending on the date of sale, you owned the home for at least 2 years and lived in it as your main home for at least 2 years, you can exclude up to $250,000 of the gain ($500,000 on a joint return in most cases). However, you cannot exclude the portion of the gain equal to depreciation allowed or allowable for periods after May 6, 1997. Since you cannot exclude all of the gain, report the entire gain realized on Form 1040, Schedule D (PDF) line 8. Report the amount of exclusion you qualify for on the line directly below the line on which you report the gain. Write Section 121 exclusion in column (a) of that line and show the amount of the exclusion in column (f) as a loss (in parentheses).
For additional information on selling your home, refer to Publication 523 (PDF), Selling Your Home.
References: 10.4 Captial Gains, Losses/Sale of Home: Losses (Homes, Stocks, Other Property) Is the loss on the sale of your home deductible?
The loss on the sale of a personal residence is a nondeductible personal loss.
References: As a result of a bankruptcy, the bank foreclosed on my house. Can you tell me where and how to report this loss on my taxes?
The foreclosure or repossession is treated as a sale or exchange from which you, the borrower, may realize gain or loss. However, if you realize a loss on personal use property, such as your residence, the loss is not deductible. Refer to Publication 544 (PDF), Sales and other Dispositions of Assets, and Publication 908 (PDF), Bankruptcy Tax Guide, for more information.
References: 11.4 Sale or Trade of Business, Depreciation, Rentals: Sales, Trades, Exchanges Can we move into our rental property, live there as our main home for two years, and sell it without having to pay capital gains tax?
You may be able to exclude your gain from the sale of your main home that you have also used for business or to produce rental income if you meet the ownership and use tests, detailed in Publication 523 (PDF), Sale of Your Home.
However, if you were entitled to take depreciation deductions because you used your home for business purposes or as rental property, you cannot exclude the part of your gain equal to any depreciation allowed or allowable as a deduction for periods after May 6, 1997. (Note: If you can show by adequate records or other evidence that the depreciation deduction allowed (did deduct) was less than the amount allowable (could have deducted), the amount you cannot exclude is the smaller of those two figures.)
The gain, exclusion, and depreciation recapture should be reported on Form 1040, Schedule D (PDF), Capital Gains and Losses, as described in Publication 523 (PDF), Selling Your Home.
References:
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