Q: We sold and purchased a home last year and I have a few tax deduction questions:
1. How much of my real estate brokerage fee on the sale of my old home is deductible, if any?
2. Can I deduct legal fees incurred when the sale of my old house fell through because of the lack of know
ledge of my real estate agent on the first attempt?
3. Can I deduct the loan origination fee and discount “points” I paid for the purchase of my new home?
A: Some of the expenses you mentioned are tax deductible, while others merely reduce your “cost basis” in the home for purposes of calculating your taxable capital gain. Tax deductions provide an immediate benefit, while reducing your cost basis only helps if and when you decide to sell your home and keep the cash.
A “deduction” is an expense that can be subtracted from your taxable income for the year. For example, if you earned $50,000 in 2010 and had $10,000 worth of deductions, your taxable income would be reduced to $40,000, thereby reducing your income tax bill for the year.
Unlike ordinary income, which is taxed the year that it is earned, capital gains may stretch over many years. You don’t pay tax on a capital gain until you sell your home and “realize” the gain.
Now, let’s determine which of the costs in your example are tax deductions and which only affect your capital gains:
1. “Points” and any other loan fees based on the amount of the loan, such as a “loan origination fee” are fully tax deductible for purchase loans for the tax year in which they are incurred.
So you deduct any loan fees you paid last year. But to make sure that the many readers who refinanced their homes last year are not confused, the tax deduction rules are different for refinances than purchases.
Any loan fees paid to refinance the mortgage on your home must be amortized over the life of the loan. For example, if you paid one point ($3,000) for a $300,000 loan, you must amortize that fee over 30 years. That means you can deduct only 1/30th of the fee ($100) each year.
Now if you pay the loan off early, as most people do by selling or refinancing again, you can deduct the remaining balance of the points and loan fees not yet amortized.
2. Real estate brokerage fees are not tax deductible, however they reduce your cost basis for purposes of calculating your capital gain when you sell a home. For example, if you paid $21,000 in real estate commissions to sell a $350,000 home, you would add that figure to the amount of money you paid to buy the home in order to calculate your taxable gain (profit) when you sell your home.
Under current tax law, you can exclude up to $250,000 in home sale profits ($500,000 for a married couple filing jointly) from capital gains tax, so for most people this is no longer an issue, especially with the drop in home prices over the past few years.
But if you happened to own a home that increases more than $500,000 in value before you sell it, you can deduct selling expenses costs such as real estate sales commissions from your taxable gain.
3. Legal fees and any other costs incurred in the sale of your home also reduce your cost basis for purposes of calculating your capital gain. So keep track of all expenses when you sell.
Steve Tytler is a licensed real estate broker and owner of Best Mortgage. You can e-mail him at features@heraldnet.com.
Talk to us
> Give us your news tips.
> Send us a letter to the editor.
> More Herald contact information.
