Tax season. This is the time when many of us are getting paperwork together to prepare our 2005 taxes. If you are a first-time homeowner, there are certain items that can and cannot be deducted on your tax return. Knowing what itemized deductions can be included in your taxes can save you money. When you first buy your home, its beneficial to understand basis. Basis is your starting point for figuring a gain or loss if you later sell your home. Its also used for figuring depreciation, if you later use part of your home for business purposes or rent. How you figure your basis depends on how you acquire your home. If you buy or build your home, your cost is your basis. Simply, the basis is the amount you paid for your home. However, the basis is different when you receive your home as a gift, or it is inherited. Be aware that the amount you paid for your home usually includes the down payment and any debt you assumed. The cost of your home also includes most settlement or closing costs you paid when you purchased the house. Some of the fees you can include in the original basis include abstract or title fees, title insurance, recording fees and transfer taxes. Also, you can include any amount the seller owes that you agree to pay, such as costs for improvements or repairs, and commissions. Items not added to the basis and not deductible include fire insurance premiums, utility charges before occupying the home, and rent for occupying the home before closing. You can not deduct charges connected with getting a mortgage loan, such as cost of a credit report or fee for an appraisal. If you built your home, your cost includes most closing costs paid when you bought the land or settled on your mortgage. Your cost also includes the amount you paid to have the house built. This includes the cost of material and labor, the amount you paid the contractor, and architects fees, utility meter and connection fees, and legal fees directly connected to building the home. Its necessary to keep track of your basis and adjusted basis during the period you own your home. You should also keep records of the events that affect basis or adjusted basis. Such records include the purchase contract and closing papers if you purchased property. Therefore, record keeping is of the utmost importance when documenting income and expenses. While you own your home, you may add certain items to your basis. You may also subtract other items from your basis. These items are called adjustments to basis. The adjusted basis is the result of events increasing or decreasing your original basis. An improvement materially adds to the value of your home, considerably prolongs its useful life, or adapts it to new uses. You must add the cost of any improvements to the basis of your home. You cannot deduct these costs. Improvements include such items as adding another bathroom or bedroom, putting up a fence, putting in new plumbing or wiring, and installing a new roof. The amount you add to your basis for improvements is your actual cost. This includes all costs for material and labor, except your own labor, and all expenses related to the improvement. For instance, if your lot was surveyed before installing a fence, the survey cost is part of the cost of the fence. Repairs are a different matter. You cannot deduct repair costs and generally cannot add them to the basis of your home. Repairs include repainting your home inside or outside, fixing floors or leaks, or replacing broken windows. However, repairs that are done as part of an extensive remodeling or restoration of your home are considered improvements. You add them to the basis of your home. Check with your accountant or tax advisor for more information on deductions concerning your home. Also, tax information for first-time homeowners is available in the IRS publication 530. This booklet and other tax forms are available on the IRS web site 24 hours a day, seven days a week at www.irs.gov. Forms and other publications can be ordered by phone at 1-800-829-3676. For tax questions, call the IRS at 1-800-829-4059. |
