- The Washington Times - Wednesday, March 3, 2004

One of the benefits I love the most about homeownership is the ability to avoid taxes. My house is a wonderful provider of tax deductions that save me thousands of dollars each year.

Here are some deductions and tax-reduction strategies you should be aware of as we approach April 15. For details, search www.irs.gov for tax tips, forms and publications.

• Mortgage interest. The biggie. Homeowners with a mortgage should have received a Form 1098 from their mortgage service provider. If you have been making payments to an owner-financier, then you need to make sure the note holder fills out this form and sends it to you. On my mortgage, this is going to turn into a $13,000-plus deduction right off the top.

Government statistics reveal I’m in good company. Nearly 36 million taxpayers claimed the deduction in 2001 — providing a cumulative deduction of $330.7 billion, about $9,200 per taxpayer. This benefit represented more than a third of all itemized deductions. Since 1980, the amount deducted has been growing at about 8.5 percent per year.

• Points. If you bought or refinanced a house last year (and with the low interest rates, nearly half of all homeowners refinanced), you now have some deductions from the points you may have paid in the financing process.

A point is a fee paid to the mortgage originator, equal to 1 percent of the loan.

If you bought your house last year and financed the purchase, you may deduct the full value of the points paid at the time of the purchase. For those who refinanced, the points are amortized over the life of the loan.

Also, if you refinanced and are deducting a fraction of the points over the term of the loan, the remainder of the points are fully deductible once you sell the house and pay off the mortgage.

• Real estate taxes. My real estate taxes paid through the mortgage company are also listed on the Form 1098, and they total more than $3,500 for the year. Combine this figure with my mortgage interest, and I have a $16,500 deduction.

• Home office. If you are making money through a home-based business, you can reduce your taxable income from that activity by deducting expenses connected to a home office.

This deduction is also available to renters, not just homeowners.

The home office opens up a lot of expenses on the house that would not otherwise be deductible. For instance, if you carpet the whole house and your home office makes up 10 percent of your living area, then 10 percent of the carpet job is deductible. Don’t overlook this valuable deduction.

• Capital-gains rollover. Real estate investors, don’t forget that you can avoid capital-gains taxes when you sell one investment property and buy another property.

This is called a 1031, or Starker, exchange. It allows you to roll over all the gain from one property to the next without paying capital-gains taxes.

An investor must use a qualified intermediary for this process, which ensures that the investor does not gain access to the funds during the transaction. If the investor gains access to the funds before settling on the replacement property, then capital-gains taxes are required to be paid.

After settlement, however, the investor can refinance with a cash-out program to gain access to the equity.

• New capital-gains-tax rates. If through the sale of real estate you experience capital gains, your tax bill was reduced thanks to the 2003 Tax Act. The new rates are now 15 percent and 5 percent, depending on your income.

• Monitor your basis. Tax time provides a great opportunity each year to keep up with the growing basis of your largest investment.

The basis is the bottom-line number you’ll use once you sell your house to determine if you owe capital-gains taxes.

It is the acquisition cost of buying the house, plus any capital improvements over the years, which can include items such as:

• Adding a new foundation or facade

• Installing new floors or replacing current floors with tile

• Replacing or reshingling the roof (but not repairing the roof)

• Installing a fire escape

• Installing new wiring (but not replacing old or defective wiring)

M. Anthony Carr has written about real estate for more than 15 years. Contact him by e-mail (manthonycarr@erols.com).

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