Hitting Home

Julian Block

WHEN IT COMES TO your home, ignorance about taxes isn’t bliss—and it could be disastrous. I often field tax questions from homeowners. Most don’t understand how they’re affected by continuously changing tax rules. Even worse, they’re totally unaware that the rules have changed.

Want to save thousands of dollars? What follows are reminders of how to sidestep tax pitfalls and take maximum advantage of frequently missed—but perfectly legal—opportunities:

Mortgage points. Do you plan to purchase a new dwelling around year-end? Try to wrap things up by Dec. 31. If, to obtain a mortgage, you pay points (each point equals 1% of the loan amount) to the lender, that will qualify you for an itemized deduction on Schedule A of Form 1040 for the current year.

You can take an immediate deduction in full for points paid on a loan to purchase, construct or improve your main home—but not a rental property or a second home that you use as a vacation retreat.

Refinancing an existing mortgage. Do that and you need to familiarize yourself with a different set of rules. Use the loan proceeds to improve your home and you can fully deduct the points. Refinance just to take advantage of lower interest rates and you must claim points only in dribs and drabs over the loan’s full term—by dividing what you paid in points by the number of monthly payments you will make over the life of the loan.

Borrowers who refinance for a second or third time frequently overlook sizable write-offs. Serial refinancers are entitled to immediately deduct what remains of the points from previous refinancings. But borrowers fail to recall those points, because they don’t show up on the closing papers of new refinancings.

Typically, several thousand dollars fall right through the cracks. For refinancers in a combined 30% federal and state bracket, every $1,000 they write off lowers taxes by $300—more than enough to pay for a pleasant night on the town.

Keep track of home improvements. The money spent yields no current deduction, but is added to your home’s cost basis—the figure used to determine gain or loss on a sale of the property. Hence, improvements reduce any taxable profit when you eventually sell.

Like most home sellers, you’re probably aware of rules that relieve you of taxes on a home-sale gain of as much as $250,000 for a single person or a married person filing a separate return, and up to $500,000 for a married couple filing a joint return. But many people are unaware that anyone with a gain greater than the exclusion threshold of $250,000 or $500,000 is stuck with taxes on the excess. No longer are sellers allowed to postpone taxes on their entire gain by buying another home that costs more than what they received for the one sold.

IRS audits. In the event the IRS questions how you calculated the gain, the audit will be less traumatic and less expensive if you’ve kept meticulous records that track the dwelling’s basis. Those records should include what you origin­ally paid for your property, plus settlement or closing costs, such as title insurance and legal fees. They should also include what you later shell out for improvements, such as adding a room or paving a driveway, as opposed to routine repairs or maintenance that add nothing to the place’s value, such as painting or papering a room or replacing a broken windowpane.

Bundle ordinary repairs into a bigger job. It might pay to postpone repair projects until they can be done in connection with an extensive remodeling or restoration project. Adding the smaller jobs into the bigger job may allow you to include some items that would otherwise be considered repairs, such as the cost of painting rooms.

Julian Block writes and practices law in Larchmont, NY, and was formerly with the IRS as a special agent (criminal investigator) and an attorney. This article is excerpted from Julian Block’s Home Seller’s Guide to Tax Savings, available at

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