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Additional Deductions
If you take a home-equity loan, you also can deduct any points that you’re
charged. Several rules apply, but generally, if you use the loan for home improvements,
the points may be fully deductible in the year that you paid them, said Jesse Weller, an
IRS spokesman in Northern California.
If you use a home-equity loan for something other than home improvement, such as paying
credit debts, you must spread the deduction of points over the life of the loan, deducting
equal amounts each year.
Also, if you pay off your home mortgage early, you may have to pay a penalty under the
terms of some bank loans. That prepayment penalty is deductible, provided it isn’t
for a specific service or a cost linked to the mortgage loan.
The advantage of consolidating credit-card debt into a home-equity loan, besides the
fact that the latter is deductible, is the generally lower interest rates on home loans.
But you are gambling your house when you borrow against it to pay off revolving credit. If
you have trouble controlling your debt or are unable to make payments, you could lose your
home to the lender.
A few payments that you can't deduct include fire, title and mortgage insurance, along
with the utility costs.
Home improvement deductions
Getting beyond the loan interest, people often are confused about the deductibility of
home-improvement costs.
You don't write off the cost of a room addition or a new roof as you make the
improvements. Instead, you add the improvement costs to the basic cost of your home. When
you sell the property these improvement costs are added to the basis in your home and have
the effect of lowering your profit and any capital gain.
For example, if you bought your home for $100,000 in 1980 and remodeled the kitchen
last year for $20,000 then sell your home for $500,000, you add the cost of the kitchen to
the purchase price. Your profit, subject to capital-gains tax, then amounts to $380,000.
Under certain conditions, tax on the first $500,000 per couple and
$250,000 per individual of the gain may be excluded.
For more details, read
IRS Pub. 523, Selling Your Home.
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Home furnishings
One reader asked whether there’s a general rule about what sort of improvements
qualify. Does new furniture, or only something that’s nailed down? In which case,
"Watch me nail my chairs to the floor."
Nailing down the furniture address the general concept on home improvements, but falls
short because nails can be removed, Weller said. The usual rule covers permanent
improvement that you can't take with you when you sell the house. Maintenance and upkeep
don't qualify.
But if you add a room, put new tile in a bathroom, add a roof or add landscaping, those
may all qualify as deductible.
The improvements should have a useful life of more than one year; so planting a tree is
part of permanent landscaping, while planting marigolds probably isn't.
Usually the cost of furnishings isn’t deductible, but even there you may have an
exception. Suppose you are selling a vacation home and part of the package is your
agreement to sell the house furnished.
That may offer some deduction. You don't add the cost of the furniture to your basis
cost of the home, but rather, the furnishings are considered tangible personal property,
Weller said. That will require some special calculations, but may be worthwhile.
You need to figure out the fair market value of the couch or dining room set and
subtract that from the sale price, Weller said. Remember, you don't use the amount that
the pieces originally cost, particularly if you bought them years ago. It’s the
current fair market value.
Costs that don't add to the life or value of your home don't qualify. So fixing gutters
and leaking pipes or repairing a broken window are considered repairs. |
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