- The Washington Times - Friday, December 29, 2000

Hear that clock ticking? If you are planning to buy or sell a home, you may be wondering if time is running out for tax-based savings.
Should you try to speed things up so you can pay some of the taxes on your sale or purchase in tax year 2000? Should you put off that home improvement project until next year? What about that home office you have been planning?
The answers to these questions are neither simple nor the same for everyone.
If you are like most people, you probably know that owning a home means tax breaks. But if you want to use the tax laws to save money according to whether you claim your deductions this year or next, you must take a careful look at your own financial situation.
"It's very hard to say whether you should buy or sell now or wait until next year," says Ricki Gerger, office manager at Long & Foster's office in Friendship Heights. "Everybody's tax situation is different. You need to make that determination with your tax adviser."
If you are waiting for more lenient tax laws thanks to a new administration, don't bank on it, says Wallace Dickson, a tax consultant with the Original Tax Center in Cleveland Park. The Original Tax Center, which opened in 1945, specializes in "special category" taxpayers, such as home office workers, teachers and members of the diplomatic community.
"There's been some talk of changing laws, but with the Congress so divided, the chance of getting that kind of legislation through is questionable," Mr. Dickson says.
So what factors should you take into account in deciding when to buy or sell your home?
First, you need to decide whether it will be worth your while to itemize your deductions at all.
"You can itemize all you want to and still end up with less than the standard deduction," Mr. Dickson says. "In that case, you'll want to go with the standard."
But if you do not normally itemize and have recently bought a home, you may want to consider itemizing to claim points and real estate taxes when you file for this year, says Sandy Gadow, author of "All About Escrow and Real Estate Closings" and a regular columnist for Realty Times.
Then there are the items that are tax deductible and the items that simply add to the value of your home.
"Make sure you get a clear sense of which items are which," Mrs. Gadow says. "It can make a real difference to how much money you will save."
Mrs. Gadow, who serves as host to a consumer help oriented Web site (www.escrowhelp.com), suggests that it might be helpful to read the Internal Revenue Service Publication No. 530, "What You Can and Cannot Deduct." It is available on line (www.irs.gov/prod/forms_pubs/pubs.html).
Normal allowable deductions include points, interest and property taxes. Certain closing costs, such as home inspection, ap-praisal fees and loan application fees, also may be deductible.
Points, each one usually representing 1 percent of your loan, can vary with the situation. At times, the seller will offer to pay points; in other situations, the payment to a lender or mortgage company is left to the buyer. In any event, points are considered a "nonrecurring closing cost," and are fully deductible in the year paid.
Interest on a home loan can be an important deduction. Remember that during the early years of a loan, most of each monthly payment pays on the interest, which is deductible, as opposed to the principal. As you continue to pay over the life of the loan, more of each monthly payment goes to pay the principal.
You are building equity, but the tax write-off for interest is minimized. The longer the term of the loan, the higher the tax savings, because you are, in effect, paying more interest. A 15-year loan, however, probably will cost you less in the long run than a 30-year or 40-year loan.
Interest can be prepaid and prorated and is deducted in the year paid. For example, a lender will prorate interest owed and collect enough at closing to cover it until the next payment period.
"The amount of prorated interest you would be required to pay may be something for you to consider when choosing a closing date," Mrs. Gadow says.
Property taxes are prorated at closing. Due dates differ from state to state, so it is important to consult a tax professional familiar with the law. The professional also will be able to anticipate some unexpected possibilities.
"Closing costs and other fees can throw you into a different tax bracket, so it is important to work with an accountant," Mrs. Gadow says.
Then other miscellaneous ex-penses may figure into your decision whether to buy now or wait.
"Maybe this year you make $60,000 and have no expenses but are anticipating a large medical expense next year," Mrs. Gadow says. "A major deduction for this year would be to your benefit."
If you are looking to figure in home improvement expenses as one of your deductions, it is important to note that most home improvement jobs are not tax deductible. Neither are co-op or homeowner association dues.
Capital improvements, or home improvements that alter the "footprint" or livability of a home, are deductible. Don't expect a tax break for replacing a roof. But if you add a bathroom or family room, you can claim the expense as a deduction. Make sure you save all documents related to these expenses, with capital improvements kept separate from major repairs and simple maintenance.
If you own a rental property, certain home improvement repairs are deductible.
"If you are planning to spend $4,000 for a new roof on a rental property, you may want to check your other deductions," Mrs. Gadow says. "It might make better sense to wait a week or two and do it next year so you can claim it for 2001."
Thinking of adding a home office this year to reap the rewards on your itemized deductions? Liberalized rules can be to your benefit.
"Claiming a home office used to be an immediate red flag," Mrs. Gadow says. "But things are very different now."
"A lot of people are working from home these days," Mr. Dickson says. "A home office became a major deductible expense in 1999. It's much easier now to claim that deduction."
Possible home office deductions include part of your mortgage payment, utilities, depreciation, repairs, insurance and even maintenance. Limitations to the home office deduction are often based on income. You will need to use Schedule A to itemize deductions, and your home office deductions must exceed 2 percent of your adjusted gross income. For the self-employed, home office deductions excluding mortgage interest and real estate taxes may not exceed your self-employed net income reported on Schedule C.
Arthur Lander, a certified public accountant and lawyer with a 20-year practice in Arlington, cautions about investing too much energy into the home office deduction.
"It all sounds quite glamorous," he says. "But you have to think of what happens when you sell your home. It's not much of a trade-off when you look at the numbers."
Working from home can have tax consequences when you sell. If you have been claiming a home office deduction on your federal taxes, you'll have to pay taxes on that portion of your profits equal to any depreciation on the office you have previously claimed.
Thanks to 1997's Taxpayer Relief Act, most people who sell their home will not have to pay overwhelming capital-gains taxes. (Capital gain for a homeowner is the difference between what you originally paid for the house and what you sell it for, minus the cost of capital improvements.)
Nearly all sellers, except those in the highest end of the market, will not have to pay taxes on the profits they make from the sale, provided they have lived in the residence for two of the past five years. Married couples who sell their primary residence and file a joint return can keep up to $500,000 in profits tax-free. Single taxpayers can keep up to $250,000. That makes the decision to sell in 2000 or 2001 less based on profits accruing from a home sale than it is on other factors.
Keep in mind, though, that your state may want some share of your capital gain.
The bottom line for the new millennium? Plan ahead, scrutinize your financial situation carefully and consult a tax professional. That way, you can count on making the most from your home.

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