Publication 530 Introduction ........................................ 1
Cat. No. 15058k
Department What You Can and Cannot Deduct .. 2
Real Estate Taxes .......................... 2
Treasury Tax Home Mortgage Interest .................
Mortgage Interest Credit ...................
Service Information for Figuring the Credit ..........................
First-Time Figuring Your Basis ........................
Adjusted Basis ................................
Keeping Records ................................
Homeowners How To Get More Information .......... 10
Index .................................................... 11
For use in preparing
Limit on itemized deductions. Certain
itemized deductions (including real estate
taxes and home mortgage interest) are limited
if your adjusted gross income is more than
$124,500 ($62,250 if you are married filing
separately). For more information, see the
instructions for Schedule A (Form 1040).
This publication provides tax information for
first-time homeowners. Your first home may
be a mobile home, a single-family house, a
townhouse, a condominium, or a cooperative
The following topics are explained.
• How you treat items such as settlement
and closing costs, real estate taxes,
home mortgage interest, and repairs.
• What you can and cannot deduct on your
• The tax credit you can claim if you re-
ceived a mortgage credit certificate when
you bought your home.
• Why you should keep track of the basis
in your home. (The basis is what your
home costs, including any improvements
you might make.)
• What records you should keep as proof
of the cost or basis.
District of Columbia first-time homebuyer
credit. You may be able to claim a one-time
tax credit of up to $5,000 if you are a buyer
of a main home in the District of Columbia.
You would then reduce the basis of your
home by the amount of the credit you
claimed. Only purchases from August 5,
1997, through December 31, 2000, qualify.
You qualify for the credit if you (and your
spouse if you are married) did not have an
ownership interest in a main home in the
District of Columbia for at least one year prior
to owning the new home. The credit is phased
out for individuals with modified adjusted
gross income between $70,000 and $90,000
($110,000 and $130,000 in the case of a joint
You figure the credit on Form 8859, Dis-
trict of Columbia First-Time Homebuyer
Credit. See the form and its instructions for
more information. your deductions by your nontaxable allow- 1. Enter the total real estate taxes for the
ance. real property tax year .......................... $730
2. Enter the number of days in the real
Useful Items property tax year that you owned the
Nondeductible payments. You cannot de- property ............................................... 122
You may want to see: 3. Divide line 2 by 365 ............................ .3342
duct any of the following items.
4. Multiply line 1 by line 3. This is your
Publication deduction. Enter it on line 6 of Sched-
• Insurance, including fire and comprehen- ule A (Form 1040) ............................... $244
523 Selling Your Home sive coverage, and title and mortgage
insurance. You can deduct $244 on your return for
527 Residential Rental Property • Wages you pay for domestic help. the year if you itemize your deductions. You
are considered to have paid this amount and
547 Casualties, Disasters, and Thefts • Depreciation. can deduct it on your return even if, under the
551 Basis of Assets • The cost of utilities, such as gas, elec- contract, you did not have to reimburse the
tricity, or water. seller.
555 Community Property Delinquent taxes. Delinquent taxes are
• Certain settlement costs. See Items not unpaid taxes that were imposed on the seller
587 Business Use of Your Home added to basis and not deductible, under for an earlier tax year. If you agree to pay
Cost as Basis, later, for more information. delinquent taxes when you buy your home,
936 Home Mortgage Interest De- you cannot deduct them. You treat them as
duction part of the cost of your home. See Real estate
Real Estate Taxes taxes, later, under Cost as Basis.
Form (and Instructions)
Most state and local governments charge an
Escrow accounts. Many monthly house
8396 Mortgage Interest Credit annual tax on the value of real property. This
payments include an amount placed in
is called a real estate tax. You can deduct
See How To Get More Information, near escrow (put in the care of a third party) for real
the tax only if the taxing authority charges a
the end of this publication, for information estate taxes. You may not be able to deduct
uniform rate on all property in its jurisdiction.
about getting these publications and this form. the total you pay into the escrow account. You
The tax must be for the welfare of the general
can deduct only the real estate taxes that the
public and not be a payment for a special
lender actually paid from escrow to the taxing
privilege granted or service rendered to you.
authority. Your real estate tax bill will show
What You Can and Deductible Taxes If the lender (or taxing jurisdiction) does
not give you a copy of the real estate tax bill,
Cannot Deduct You can deduct real estate taxes imposed on
you. You must have paid them either at
ask for it. You will need it to decide if the
amount paid includes any nondeductible
To deduct expenses of owning a home, you settlement or closing, or to a taxing authority itemized charges for services or local bene-
must file Form 1040 and itemize your de- (either directly or through an escrow account) fits.
ductions on Schedule A (Form 1040). If you during the year. If you own a cooperative
choose to itemize, you cannot take the apartment, you can deduct your share of the
standard deduction. See the Form 1040 in- Refund or rebate of real estate taxes. If
corporation's deductible taxes. See Special
structions if you have questions about you receive a refund or rebate of real estate
Rules for Cooperatives, later.
whether you should itemize your deductions taxes this year for amounts you paid this year,
or claim the standard deduction. you must reduce your real estate tax de-
This section explains what expenses you Where to deduct real estate taxes. Enter duction by the amount refunded to you. If the
can deduct as a homeowner. It also points the amount of your deductible real estate refund or rebate was for real estate taxes paid
out expenses that are not deductible. This taxes on line 6 of Schedule A (Form 1040). for a prior year, you may have to include
section has two primary discussions: real es- some or all of the refund in your income. For
tate taxes and home mortgage interest. Gen- more information, see Recoveries in Publica-
Real estate taxes paid at settlement or tion 525, Taxable and Nontaxable Income.
erally, your real estate taxes and home mort- closing. Real estate taxes are usually di-
gage interest are included in your house vided so that you and the seller each pay
payment. taxes for the part of the property tax year Real Estate Items You
each of you owned the home. Your share of Cannot Deduct
Your house payment. If you took out a loan these taxes is fully deductible.
Division of real estate taxes. For federal The following items are not deductible as real
(mortgage) to finance the purchase of your estate taxes.
home, you probably have to make monthly income tax purposes, the seller is treated as
house payments. Your house payment may paying the property taxes up to the date of
cover several costs of owning a home. The sale. You (the buyer) are treated as paying Charges for services. An itemized charge
only costs you can deduct are real estate the taxes beginning with the date of sale. This for services to specific property or people is
taxes actually paid to the taxing authority and applies regardless of the lien dates under lo- not a tax, even if the charge is paid to the
interest that qualifies as home mortgage in- cal law. Generally, this information is included taxing authority. You cannot deduct the
terest. These are discussed in more detail on the settlement statement you get at clos- charge as a real estate tax if it is:
You cannot deduct other items included in You and the seller each are considered to 1) A unit fee for the delivery of a service
your house payment. These other items may have paid your own share of the taxes, even (such as a $5 fee charged for every
include the following items. if one or the other paid the entire amount. You 1,000 gallons of water you use),
can each deduct your own share, if you 2) A periodic charge for a residential ser-
• Fire or homeowner's insurance premi- itemize deductions, for the year the property vice (such as a $20 per month or $240
ums. is sold. annual fee charged for trash collection),
• FHA mortgage insurance premiums. Example. You bought your home on
September 1. The property tax year (the pe- 3) A flat fee charged for a single service
• The amount applied to reduce the princi- riod to which the tax relates) in your area is provided by your local government (such
pal of the mortgage.
the calendar year. The tax for the year was as a $30 charge for mowing your lawn
$730 and was due and paid by the seller on because it had grown higher than per-
Minister's or military housing allowance. August 15. mitted under a local ordinance).
If you are a minister or a member of the uni- You owned your new home during the real
formed services and receive a housing al- property tax year for 122 days (September 1 You must look at your real estate tax
lowance that is not taxable, you can still de-
duct your real estate taxes and your home
to December 31, including your date of pur-
chase). You figure your deduction for real
! bill to decide if any nondeductible
CAUTION itemized charges, such as those just
mortgage interest. You do not have to reduce estate taxes on your home as follows. listed, are included in the bill. If your taxing
authority (or lender) does not furnish you a Deductible taxes. You figure your share of deduct in each year only the interest that
copy of your real estate tax bill, ask for it. real estate taxes in the following way. qualifies as home mortgage interest for that
year. However, there is an exception. See the
Assessments for local benefits. You can- 1) Divide the number of your shares of discussion on Points, later.
not deduct amounts you pay for local benefits stock by the total number of shares out-
that tend to increase the value of your prop- standing, including any shares held by Late payment charge on mortgage pay-
erty. Local benefits include the construction the corporation. ment. You can deduct as home mortgage
of streets, sidewalks, or water and sewer 2) Multiply the corporation's deductible real interest a late payment charge if it was not for
systems. You must add these amounts to the estate taxes by the number you figured a specific service performed by your mort-
basis of your property. in (1). This is your share of the real es- gage holder.
You can, however, deduct assessments tate taxes.
(or taxes) for local benefits if they are for Mortgage prepayment penalty. If you pay
maintenance, repair, or interest charges re- Generally, your share of the corporation's off your home mortgage early, you may have
lated to those benefits. An example is a real estate tax is the amount the corporation to pay a penalty. You can deduct that penalty
charge to repair an existing sidewalk and any gives you. It must reasonably reflect the cost as home mortgage interest.
interest included in that charge. of real estate taxes for your dwelling unit.
If only a part of the assessment is for Refund of real estate taxes. If the cor- Ground rent. In some states (Maryland for
maintenance, repair, or interest charges, you poration receives a refund of real estate taxes example), you may buy your home subject to
must be able to show the amount of that part it paid in an earlier year, it must reduce the a ground rent. A ground rent is an obligation
to claim the deduction. If you cannot show amount of real estate taxes paid this year you assume to pay a fixed amount per year
what part of the assessment is for mainte- when it allocates the tax expense to you. Your on the property. Under this arrangement, you
nance, repair, or interest charges, you cannot deduction for real estate taxes the corporation are leasing (rather than buying) the land on
deduct any of it. paid this year is reduced by your share of the which your home is located.
An assessment for a local benefit may be refund the corporation received. Redeemable ground rents. If you make
listed as an item in your real estate tax bill. If
annual or periodic rental payments on a
so, use the rules in this section to find how
Home Mortgage Interest redeemable ground rent, you can deduct the
much of it, if any, you can deduct.
payments as mortgage interest. The ground
This section of the publication gives you basic rent is a redeemable ground rent only if all
Transfer taxes (or stamp taxes). You can- information about home mortgage interest, of the following are true.
not deduct transfer taxes and similar taxes including information on interest paid at
and charges on the sale of a personal home. settlement, points, and Form 1098, Mortgage 1) Your lease, including renewal periods, is
If you are the buyer and you pay them, in- Interest Statement. for more than 15 years.
clude them in the cost basis of the property. Most home buyers take out a mortgage
If you are the seller and you pay them, they (loan) to buy their home. They then make 2) You can freely assign the lease.
are expenses of the sale and reduce the monthly house payments to either the mort- 3) You have a present or future right (under
amount realized on the sale. gage holder or someone collecting the pay- state or local law) to end the lease and
ments for the mortgage holder. (See Your buy the lessor's entire interest in the land
Homeowners association assessments. house payment, earlier, under What You Can by paying a specified amount.
You cannot deduct these assessments be- and Cannot Deduct.)
cause the homeowners association imposes Usually, you can deduct the entire part of 4) The lessor's interest in the land is pri-
them rather than a state or local government. your house payment that is for mortgage in- marily a security interest to protect the
terest, if you itemize your deductions on rental payments to which he or she is
Special Rules for Cooperatives Schedule A (Form 1040). However, your de- entitled.
duction may be limited if:
If you own a cooperative apartment, some Payments made to end the lease and to
special rules apply to you, though you gen- 1) Your total mortgage balance is more buy the lessor's entire interest are not
erally receive the same tax treatment as other than $1 million ($500,000 if married filing redeemable ground rents. You cannot deduct
homeowners. As an owner of a cooperative separately), or them.
apartment, you own shares of stock in a cor- Nonredeemable ground rents. Pay-
poration that owns or leases housing facilities. 2) You took out a mortgage for reasons
ments on a nonredeemable ground rent are
You can deduct your share of the corpo- other than to buy, build, or improve your
not mortgage interest. You can deduct them
ration's deductible real estate taxes if the home.
as rent if they are a business expense or if
cooperative housing corporation meets all they are for rental property.
of the following conditions. If either of these situations applies to you, you
will need to get Publication 936. You may also
1) The corporation has only one class of need Publication 936 if you later refinance Cooperative apartment. You can usually
stock outstanding. your mortgage or buy a second home. treat the interest on a loan you took out to buy
stock in a cooperative housing corporation as
2) Each stockholder, solely because of Refund of home mortgage interest. If you home mortgage interest if you own a cooper-
ownership of the stock, can live in a receive a refund of home mortgage interest ative apartment and the cooperative housing
house, apartment, or house trailer that you deducted in an earlier year and that corporation meets the conditions described
owned or leased by the corporation. reduced your tax, you generally must include earlier under Special Rules for Cooperatives.
3) No stockholder can receive any distribu- the refund in income in the year you receive In addition, you can treat as home mortgage
tion out of capital, except on a partial or it. For more information, see Recoveries in interest your share of the corporation's
complete liquidation of the corporation. Publication 525. The amount of the refund deductible mortgage interest. Figure your
will usually be shown on the mortgage inter- share of mortgage interest the same way that
4) The tenant-stockholders pay at least est statement you receive from your mortgage is shown for figuring your share of real estate
80% of the corporation's gross income lender. See Mortgage Interest Statement, taxes. For more information on cooperatives,
for the tax year. For this purpose, gross later. see Special Rule for Tenant-Stockholders in
income means all income received dur- Cooperative Housing Corporations in Publi-
ing the entire tax year, including any re- cation 936.
ceived before the corporation changed Deductible Mortgage Interest Refund of cooperative's mortgage in-
to cooperative ownership. To be deductible, the interest you pay must terest. You must reduce your mortgage in-
be on a loan secured by your main home or terest deduction by your share of any cash
Tenant-stockholders. A tenant-stockholder a second home. The loan can be a first or portion of a patronage dividend that the co-
can be any entity (such as a corporation, second mortgage, a home improvement loan, operative receives. The patronage dividend
trust, estate, partnership, or association) as or a home equity loan. is a partial refund to the cooperative housing
well as an individual. The tenant-stockholder corporation of mortgage interest it paid in a
does not have to live in any of the cooper- Prepaid interest. If you pay interest in ad- prior year.
ative's dwelling units. The units that the vance for a period that goes beyond the end If you receive a Form 1098 from the co-
tenant-stockholder has the right to occupy of the tax year, you must spread this interest operative housing corporation, the form
can be rented to others. over the tax years to which it applies. You can should show only the amount you can deduct.
Mortgage Interest Home improvement loan. You can also area (test 3), you can deduct in the year paid
fully deduct in the year paid points paid on a only the points that are generally charged.
Paid at Settlement loan to improve your main home, if state- Any additional points are prepaid interest, and
One item that normally appears on a settle- ments (1) through (5) are true. you must spread them over the life of the
ment or closing statement is home mortgage mortgage.
interest. Figure A. You can use Figure A as a quick
You can deduct the interest that you pay guide to see whether your points are fully Mortgage ending early. If you spread your
at settlement if you itemize your deductions deductible in the year paid. If you do not deduction for points over the life of the mort-
on Schedule A (Form 1040). This amount qualify under the exception to deduct the full gage, you can deduct any remaining balance
should be included in the mortgage interest amount of points in the year paid, see Points in the year the mortgage ends. A mortgage
statement provided by your lender. See the in chapter 8 of Publication 535, Business Ex- may end early due to a prepayment, refi-
discussion under Mortgage Interest State- penses, for the rules on when and how much nancing, foreclosure, or similar event.
ment, later. Also, if you pay interest in ad- you can deduct.
vance, see Prepaid interest, earlier, and Example. Dan refinanced his mortgage
Points, next. Amounts charged for services. Amounts in 1993 and paid $3,000 in points that he had
charged by the lender for specific services to spread out over the life of the mortgage.
Points connected to the loan are not interest. Ex- He had deducted $1,000 of these points
amples of these charges are: through 1997.
The term “points” is used to describe certain Dan prepaid his mortgage in full in 1998.
charges paid, or treated as paid, by a bor- 1) Appraisal fees, He can deduct the remaining $2,000 of points
rower to obtain a home mortgage. Points in 1998.
may also be called loan origination fees, 2) Notary fees,
maximum loan charges, loan discount, or 3) Preparation costs for the mortgage note Form 1098. The mortgage interest statement
discount points. or deed of trust, you receive should show not only the total
A borrower is treated as paying any points
4) Mortgage insurance premiums, and interest paid during the year, but also your
that a home seller pays for the borrower's
deductible points. See Mortgage Interest
mortgage. See Points paid by the seller, later. 5) VA funding fees. Statement, later.
General rule. You cannot deduct the full You cannot deduct these amounts as points
amount of points in the year paid. Because either in the year paid or over the life of the Where To Deduct
they are prepaid interest, you generally must mortgage. For information about the tax Home Mortgage Interest
deduct them over the life (term) of the mort- treatment of these amounts and other settle-
ment fees and closing costs, see Basis, later. Enter on line 10 of your Schedule A (Form
gage. 1040) the home mortgage interest and points
Exception. You can fully deduct points reported to you on Form 1098 (discussed
in the year paid if you meet all the following Points paid by the seller. The term
“points” includes loan placement fees that the next). If you did not receive a Form 1098,
tests. enter your deductible interest on line 11, and
seller pays to the lender to arrange financing
for the buyer. The seller cannot deduct these any deductible points on line 12. See Table
1) Your loan is secured by your main home. 1 for a summary of where to deduct home
(Your main home is the one you live in fees as interest. But they are a selling ex-
pense that reduces the seller's amount real- mortgage interest and real estate taxes.
most of the time.) If you paid home mortgage interest to the
2) Paying points is an established business The buyer treats the points as if he or she person from whom you bought your home,
practice in the area where the loan was had paid them. If all the tests under the Ex- show that person's name, address, and social
made. ception are met, the buyer deducts the points security number (SSN) or employer identifi-
in the year paid. If any of those tests is not cation number (EIN) on the dotted lines next
3) The points paid were not more than the met, the buyer deducts the points over the life to line 11. The seller must give you this
points generally charged in that area. of the loan. number and you must give the seller your
The buyer also reduces the basis of the SSN. Failure to meet either of these re-
4) You use the cash method of accounting. quirements may result in a $50 penalty for
This means you report income in the home by the amount of the seller-paid points.
See Points paid by seller, later, under Basis. each failure.
year you receive it and deduct expenses
in the year you pay them. Most individ-
uals use this method. Funds provided are less than points. If you Mortgage Interest Statement
meet all the tests in the Exception except that If you paid $600 or more of mortgage interest
5) The points were not paid in place of the funds you provided were less than the
amounts that ordinarily are stated sepa- (including certain points) during the year on
points charged to you (test 9), you can deduct any one mortgage to a mortgage holder in the
rately on the settlement statement, such the points in the year paid up to the amount
as appraisal fees, inspection fees, title course of that holder's trade or business, you
of funds you provided. In addition, you can should receive a Form 1098, Mortgage In-
fees, attorney fees, and property taxes. deduct any points paid by the seller. terest Statement, or similar statement from
6) You use your loan to buy or build your Example 1. When you took out a the mortgage holder. The statement will show
main home. $100,000 mortgage loan to buy your home in the total interest paid on your mortgage dur-
December, you were charged one point ing the year. It will also show the deductible
7) The points were computed as a per- points you paid during the year and any points
centage of the principal amount of the ($1,000). You meet all the tests for deducting
points in the Exception, except the only funds you can deduct that were paid by the person
mortgage. who sold you your home. See Points, earlier.
you provided were a $750 down payment.
8) The amount is clearly shown on the Of the $1,000 you were charged for points, The interest you paid at settlement should
settlement statement (for example, Form you can deduct $750 in the year paid. You be included on the statement. If it is not, add
HUD-1) as points charged for the mort- spread the remaining $250 over the life of the the interest from the settlement sheet that
gage. The points may be shown as paid mortgage. qualifies as home mortgage interest to the
from either your funds or the seller's. total shown on Form 1098 or similar state-
Example 2. The facts are the same as in ment. Put the total on line 10 of Schedule A
9) The funds you provided at or before Example 1, except that the person who sold (Form 1040) and attach a statement to your
closing, plus any points the seller paid, you your home also paid one point ($1,000) return explaining the difference. Write “See
were at least as much as the points to help you get your mortgage. In the year attached” next to line 10.
charged. The funds you provided do not paid, you can deduct $1,750 ($750 of the A mortgage holder can be a financial in-
have to have been applied to the points. amount you were charged plus the $1,000 stitution, a governmental unit, or a cooper-
They can include a down payment, an paid by the seller). You must reduce the basis ative housing corporation. If a statement
escrow deposit, earnest money, and of your home by the $1,000 paid by the seller. comes from a cooperative housing corpo-
other funds you paid at or before closing ration, it will generally show your share of in-
for any purpose. You cannot have bor- Excess points. If you meet all the tests in terest.
rowed these funds from your lender or the Exception except that the points paid You should receive your mortgage interest
mortgage broker. were more than are generally paid in your statement for each year by January 31 of the
Figure A. Are My Points Fully Deductible This Year?
Is the loan secured by your main home?
Is the payment of points an established business practice in
Were the points paid more than the amount generally charged
in your area?
Do you use the cash method of accounting?
Were the points paid in place of amounts that ordinarily are
separately stated on the settlement sheet?
Did you take out the loan to improve your main home?
Did you take out the loan to buy or build your main home?
Were the points computed as a percentage of the principal
amount of the mortgage?
Were the funds you provided (other than those you borrowed No
from your lender or mortgage broker), plus any points the
seller paid, at least as much as the points charged?*
Is the amount paid clearly shown as points on the settlement
You cannot fully deduct the points this
You can fully deduct the points this year.
year. See the discussion on Points.
* The funds you provided do not have to have been applied to the points. They can include a down payment, an escrow deposit, earnest money, and other funds
you paid at or before closing for any purpose.
following year. A copy of this form will also
be sent to the IRS. Table 1. Where to Deduct Interest and Taxes Paid on Your Home
See the text for information on what expenses are eligible.
Example. You bought a new home on
May 3. You paid no points on the purchase. IF you are eligible to deduct: THEN report the amount
During the year, you made mortgage pay- on Schedule A (Form 1040):
ments which included $1,872 deductible in-
terest on your new home. The settlement Real estate taxes line 6
sheet for the purchase of the home included
interest of $232 for 29 days in May. The Home mortgage interest and points line 10
mortgage statement you receive from the reported on Form 1098
lender includes total interest of $2,104
($1,872 + $232). You can deduct the $2,104 Home mortgage interest not reported on line 11
if you itemize your deductions.
Refund of overpaid interest. If you receive Points not reported on Form 1098 line 12
a refund of mortgage interest you overpaid in
a prior year, you generally will receive a Form
1098 showing the refund in box 3. See Re- ture (repay) a portion of the credit. For addi-
fund of home mortgage interest, earlier, under Dividing the Credit
tional information, see Publication 523.
Home Mortgage Interest. If two or more persons (other than a married
couple filing a joint return) hold an interest in
More than one borrower. If you and at least Figuring the Credit the home to which the MCC relates, the credit
one other person (other than your spouse if must be divided based on the interest held
Figure your credit on Form 8396. by each person.
you file a joint return) were liable for and paid
interest on a mortgage that was for your
home, and the other person received a Form Mortgage not more than certified indebt- Example. John and his brother, George,
1098 showing the interest that was paid dur- edness. If your mortgage is equal to (or were issued an MCC. They used it to get a
ing the year, attach a statement to your return smaller than) the certified indebtedness mortgage on their main home. John has a
explaining this. Show how much of the inter- amount shown on your MCC, enter on line 1 60% ownership interest in the home, and
est each of you paid, and give the name and of Form 8396 all the interest you paid on your George has a 40% ownership interest in the
address of the person who received the form. mortgage during the year. home. John paid $5,400 mortgage interest
Deduct your share of the interest on line 11 this year and George paid $3,600.
of Schedule A (Form 1040), and write “See Mortgage more than certified indebt- The MCC shows a credit rate of 25% and
attached” next to the line. edness. If your mortgage is larger than the a certified indebtedness amount of $65,000.
certified indebtedness amount shown on your The loan amount (mortgage) on their home
MCC, you can figure the credit on only part is $60,000. Because the credit rate is more
of the interest you paid. To find the amount than 20%, the credit is limited to $2,000.
Mortgage Interest to enter on line 1, multiply the total interest
you paid during the year on your mortgage
John figures the credit by multiplying the
mortgage interest he paid this year ($5,400)
Credit by the following fraction. by the certificate credit rate (25%) for a total
of $1,350. His credit is limited to $1,200
Certified indebtedness amount on your MCC
A mortgage interest credit is available for ($2,000 × 60%).
first-time home buyers whose income is gen- Original amount of your mortgage
George figures the credit by multiplying
erally below the median income for the area the mortgage interest he paid in this year
where they live. The credit is intended to help This fraction, which you may change to a ($3,600) by the certificate credit rate (25%) for
lower-income individuals afford home owner- percentage, will not change as long as you a total of $900. His credit is limited to $800
ship. The tax credit is allowed each year for can take the credit. ($2,000 × 40%).
part of the home mortgage interest they pay.
To be eligible for the credit, you must get Example. Emily's mortgage loan is
a mortgage credit certificate (MCC) from $50,000. The certified indebtedness amount
your state or local government. Generally, an on her MCC is $40,000. She paid $4,000 in- Carryforward
MCC is issued only in connection with a new terest in this year. Emily figures the interest If your allowable credit is reduced because
mortgage for the purchase of your main to enter on line 1 of Form 8396 as follows: of the limit based on your tax, you can carry
home. $40,000 forward the unused portion of the credit to the
The MCC will show the certificate credit = 80% (.80) next 3 years or until used, whichever comes
rate you will use to figure your credit. It will first.
also show the certified indebtedness amount $4,000 .80 = $3,200
on which the interest is eligible for the credit. Example. You receive a mortgage credit
Emily enters $3,200 on line 1 of Form 8396. certificate from State X. This year, your tax
You must contact the appropriate In each later year, she will figure her credit liability is $1,100, and your mortgage interest
TIP government agency about getting an using only 80% of the interest she pays for credit is $1,700. You claim no other credits.
MCC before you get a mortgage and that year. Your unused mortgage interest credit for this
buy your home. Contact your state or local
year is $600 ($1,700 − $1,100). You can
housing finance agency for information about
carry forward this amount to the next 3 years.
the availability of MCCs in your area. Limits
Two limits may apply to your credit:
Claiming the credit. To claim the credit, Credit rate more than 20%. If you are sub-
complete Form 8396 and attach it to your 1) A limit based on the credit rate, and ject to the $2,000 limit because your certif-
Form 1040. Include the credit in your total for icate credit rate is more than 20%, you cannot
line 47 of Form 1040, and check box b. 2) A limit based on your tax. carry forward any amount more than $2,000
(or your share of the $2,000 if you must divide
Reducing your home mortgage interest Limit based on credit rate. If the certificate the credit).
deduction. If you itemize your deductions credit rate is higher than 20%, the credit
on Schedule A (Form 1040), reduce your cannot be more than $2,000. Example. In the earlier example under
home mortgage interest deduction by the Dividing the Credit, John and George used
amount of the mortgage interest credit. Limit based on tax. Your credit (after ap- the entire $2,000 credit. The excess $150 for
plying the limit based on the credit rate) can- John ($1,350 − $1,200) and $100 for George
Selling your home. If you purchase a home not be more than your regular tax liability on ($900 − $800) cannot be carried forward to
after 1990 using an MCC, and you sell that line 40 of Form 1040 reduced by any credits future years, despite the tax liabilities for John
home within 9 years, you will have to recap- claimed on lines 41 through 44 of Form 1040. and George.
Refinancing Table 2. Effect of Refinancing on Your MCC Credit
If you refinance your original mortgage loan
on which you had been given an MCC, you IF you get a new (reissued) MCC and the THEN the interest you claim on
must get a new MCC to be able to claim the amount of your new mortgage is: Form 8396, line 1, is:
credit on the new loan. And the amount of
credit you can claim on the new loan may Smaller or equal to the certificate All the interest paid during the year on your
change. Table 2 summarizes how to figure indebtedness amount on the new MCC new mortgage*
your MCC credit if you refinance your original
mortgage loan. Larger than the certificate indebtedness on Interest paid during the year on your new
An issuer may reissue an MCC after you the new MCC mortgage multiplied by the following fraction.
refinance your mortgage, but only up to one
year after the date of the refinancing. If you Certificate indebtedness on
did not get a new MCC, you may want to your new MCC
contact the state or local housing finance Original amount of your mortgage
agency that issued your original MCC for in-
formation about whether you can get a reis- * The credit using the new MCC cannot be more than the credit using the old MCC. See New MCC
sued MCC. cannot increase your credit.
Purchase. The basis of a home you bought
Year of refinancing. In the year of refi- is the amount you paid for it. This usually in-
nancing, add the applicable amount of inter-
est paid on the old mortgage and the appli-
Basis cludes your down payment and any debt you
assumed. The basis of a cooperative apart-
cable amount of interest paid on the new Basis is your starting point for figuring a gain
ment is the amount you paid for your shares
mortgage, and enter the total on line 1 of or loss if you later sell your home, or for fig-
in the corporation that owns or controls the
Form 8396. uring depreciation if you later use part of your
property. This amount includes any purchase
If your new MCC has a credit rate different home for business purposes or for rent.
commissions or other costs of acquiring the
from the rate on the old MCC, you must at- While you own your home, you may add
tach a statement to Form 8396. The state- certain items to your basis. You may subtract
ment must show the calculation for lines 1, certain other items from your basis. These
2, and 3 for the part of the year when the old items are called adjustments to basis and are
Construction. If you contracted to have your
MCC was in effect. It must show a separate explained later under Adjusted Basis.
home built on land that you own, your basis
calculation for the part of the year when the It is important that you understand these
in the home is your basis in the land plus the
new MCC was in effect. Combine the terms when you first acquire your home be-
amount you paid to have the home built. This
amounts of each line 3, enter the total on line cause you must keep track of your basis and
includes the cost of labor and materials, the
3 of the form, and write “See attached” on the adjusted basis during the period you own your
amount you paid the contractor, any archi-
dotted line. home. You must also keep records of the
tect's fees, building permit charges, utility
events that affect basis or adjusted basis. See
meter and connection charges, and legal fees
Keeping Records, later.
New MCC cannot increase your credit. that are directly connected with building your
The credit that you claim with your new MCC home. If you built all or part of your home
cannot be more than the credit that you could yourself, your basis is the total amount it cost
have claimed with your old MCC. Figuring Your Basis you to build it. You cannot include the value
In most cases, the agency that issues your How you figure your basis depends on how of your own labor or any other labor you did
new MCC will make sure that it does not in- you acquire your home. If you buy or build not pay for.
crease your credit. However, if either your old your home, your cost is your basis. If you
loan or your new loan has a variable (adjust- receive your home as a gift, your basis is
able) interest rate, you will need to check this usually the adjusted basis that the person Settlement or closing costs. If you bought
yourself. In that case, you will need to know who gave you the home had. If you inherit your home, you probably paid settlement or
the amount of the credit you could have your home, the fair market value at that time closing costs in addition to the contract price.
claimed using the old MCC. is generally your basis. Each of these topics These costs are divided between you and the
There are two methods for figuring the is discussed later. seller according to the sales contract, local
credit you could have claimed. Under one custom, or understanding of the parties. If
method, you figure the actual credit that you built your home, you probably paid these
would have been allowed. This means you Fair market value. Fair market value is the costs when you bought the land or settled on
use the credit rate on the old MCC and the price that property would sell for on the open your mortgage.
interest you would have paid on the old loan. market. It is the price that would be agreed The only settlement or closing costs you
on between a willing buyer and a willing can deduct are home mortgage interest and
As part of your tax records, you seller, with neither having to buy or sell, and certain real estate taxes. You deduct them in
TIP should keep your old MCC and the both having reasonable knowledge of the the year you buy your home if you itemize
schedule of payments for your old relevant facts. your deductions. You can add certain other
mortgage. settlement or closing costs to the basis of
Property transferred from a spouse. If your Real estate taxes. Real estate taxes are
If your old loan was a variable rate mort- home is transferred to you from your spouse,
gage, you can use another method to deter- usually divided so that you and the seller each
or from your former spouse as a result of a pay taxes for the part of the property tax year
mine the credit that you could have claimed. divorce, your basis is the same as your
Under this method, you figure the credit using that each owned the home. See the earlier
spouse's or former spouse's adjusted basis discussion of Real estate taxes paid at
a payment schedule of a hypothetical self- just before the transfer. Publication 504, Di-
amortizing mortgage with level payments settlement or closing, under Real Estate
vorced or Separated Individuals, fully dis- Taxes, to figure the real estate taxes you paid
projected to the final maturity date of the old cusses transfers between spouses.
mortgage. The interest rate of the hypothet- or are considered to have paid.
ical mortgage is the annual percentage rate If you pay real estate taxes treated as
(APR) of the new mortgage for purposes of imposed on the seller, that is, taxes up to the
Cost as Basis date of sale, you cannot deduct those taxes.
the Federal Truth in Lending Act. The prin-
cipal of the hypothetical mortgage is the re- The cost of your home, whether you pur- If the seller did not reimburse you, you can
maining outstanding balance of the certified chased it or constructed it, is the amount you add those taxes to your basis in the home. If
mortgage indebtedness shown on the old paid for it, including any debt you assumed. the seller paid real estate taxes treated as
MCC. The cost of your home includes most imposed on you (the taxes beginning with the
settlement or closing costs you paid when you date of sale), you are considered to have
You must choose one method and bought the home. If you built your home, your paid, and can deduct, those taxes. If you did
! use it consistently beginning with the
CAUTION first tax year for which you claim the
cost includes most closing costs paid when
you bought the land or settled on your mort-
not reimburse the seller, you must reduce
your basis in your home by the amount of
credit based on the new MCC. gage. those taxes.
Example 1. You bought your home on
September 1. The property tax year in your Table 3. Adjusted Basis
area is the calendar year, and the tax is due This table summarizes items that will generally increase or decrease your basis in
on August 15. The real estate taxes on the your home.
home you bought were $730 for the year and
had been paid by the seller on August 15. Increases: Decreases:
You did not reimburse the seller for your
share of the real estate taxes from September Improvements (see Improvements) Insurance reimbursement for casualty
1 through December 31. You must reduce the losses
basis of your home by the $244 [(122 ÷ 365) Special assessments for local
× $730] the seller paid for you. You can de- improvements (see Assessments for Deductible casualty loss not covered by
duct your $244 share of real estate taxes on local benefits) insurance
your return for the year you purchased your
home. Amounts spent to restore damaged Payment received for easement or
property right-of-way granted
Example 2. You bought your home on
May 1, 1998. The property tax year in your Depreciation deduction if home is used for
area is the calendar year. The taxes for the business or rental purposes
previous year are assessed on January 2 and
are due on May 31 and November 30. Under Gain from sale of old residence on which
state law, the taxes become a lien on May tax was postponed
31. You agreed to pay all taxes due after the
date of sale. The taxes due in 1998 for 1997 Value of energy conservation subsidy (see
were $420. The taxes due in 1999 for 1998 Energy conservation subsidy)
will be $465.
You cannot deduct any of the taxes paid
in 1998 because they relate to the 1997 2) Charges for using utilities, Inheritance
property tax year. You did not own the home If an estate tax return was filed, your basis in
3) Rent for occupying the home before
until 1998. Instead, you add the $420 to the a home you inherited is generally the fair
cost (basis) of your home. market value of the home at the date of the
Because you owned the home in 1998 for 4) Other fees or charges for services con- decedent's death or on the alternate valuation
245 days (May 1 to December 31), you can cerning occupying the home, and date if the estate qualified and used this date.
take a tax deduction on your 1999 return of Your basis is the value of the home listed on
$312 [(245 ÷ 365) × $465] paid in 1999 for 5) Charges connected with getting or refi- the estate tax return.
1998. You add the remaining $153 ($465 − nancing a mortgage loan, such as: If an estate tax return was not filed, your
$312) of taxes paid in 1999 to the cost (basis) basis is the appraised value of the home for
of your home. a) FHA mortgage insurance premiums
state inheritance or transmission taxes at the
Items added to basis. You can include and VA funding fees,
decedent's date of death. Publication 551 and
in your basis the settlement fees and closing Publication 559, Survivors, Executors, and
costs that are for buying your home. A fee is b) Loan assumption fees,
Administrators, have more information on the
for buying the home if you would have had to c) Cost of a credit report, and basis of inherited property.
pay it even if you paid cash for the home.
Some of the settlement fees and closing d) Fee for an appraisal required by a
costs that you can include in the original basis lender. Adjusted Basis
of your home are: While you own your home, various events
Points paid by seller. If you bought your may take place that can change the original
1) Attorney's fees (such as fees for the title home after April 3, 1994, you must reduce basis of your home. These events can in-
search and preparing the sales contract your basis by any points paid for your mort- crease or decrease your original basis. The
and deed), gage by the person who sold you your home. result is called adjusted basis. See Table 3
2) Abstract fees, If you bought your home after 1990 but for a list of some of the items that can adjust
before April 4, 1994, you must reduce your your basis.
3) Charges for installing utility service, basis by seller-paid points only if you de-
ducted them. See Points, earlier, for the rules Improvements. An improvement materially
4) Transfer and stamp taxes, on deducting points. adds to the value of your home, considerably
5) Surveys, prolongs its useful life, or adapts it to new
uses. You must add the cost of any improve-
6) Owner's title insurance, and Gift ments to the basis of your home. You cannot
7) Unreimbursed amounts the seller owes If someone gave you your home, your basis deduct these costs.
but you pay, such as: is the same as that person's (the donor's) Improvements include putting a recreation
adjusted basis (defined later) when it was room in your unfinished basement, adding
a) Back taxes or interest, given to you. However, your basis in the another bathroom or bedroom, putting up a
home for determining a loss on its sale is the fence, putting in new plumbing or wiring, in-
b) Recording or mortgage fees, lesser of the fair market value of the home stalling a new roof, and paving your driveway.
c) Charges for improvements or re- when it was given to you, or the donor's ad- Amount added to basis. The amount
pairs, or justed basis. you add to your basis for improvements is
If you received your home as a gift (after your actual cost. This includes all costs for
d) Selling commissions. 1976), add to your basis (the donor's adjusted material and labor, except your own labor,
basis) the part of any federal gift tax paid that and all expenses related to the improvement.
If the seller actually paid for any item that is due to the net increase in the value of the For example, if you had your lot surveyed to
you are liable for and that you can take a home. Figure this part by multiplying the fed- put up a fence, the cost of the survey is a part
deduction for (such as your share of the real eral gift tax paid on the gift of the home by a of the cost of the fence.
estate taxes for the year of sale), you must fraction. The numerator (top part) of the You must also add to your basis state and
reduce your basis by that amount unless you fraction is the net increase in the value of the local assessments for improvements such as
are charged for it in the settlement. home, and the denominator (bottom part) is streets and sidewalks. These assessments
Items not added to basis and not the value of the home. The net increase in the are discussed earlier under Real Estate
deductible. There are some settlement costs value of the home is the fair market value of Taxes.
which you cannot deduct or add to your basis. the home minus the donor's adjusted basis. Repairs versus improvements. A repair
These include: Publication 551 gives examples of figuring keeps your home in an ordinary, efficient op-
your basis when you received property as a erating condition. It does not add to the value
1) Fire insurance premiums, gift. of your home or prolong its life. Repairs in-
clude repainting your home inside or outside, Table 4. Record of Home Improvements
fixing your gutters or floors, fixing leaks or
plastering, and replacing broken window Keep this for your records. Also keep receipts or other proof of improvements.
panes. You cannot deduct repair costs and
Caution: Remove from this record any improvements that are no longer part of
generally cannot add them to the basis of
your home. your main home. For example, if you put wall-to-wall carpeting in your home
However, repairs that are done as part of and later replace it with new wall-to-wall carpeting, remove the cost of the first
an extensive remodeling or restoration of your carpeting.
home are considered improvements. You
add them to the basis of your home. (a) (b) (c) (a) (b) (c)
Records to keep. You can use Table 4 Type of Improvement Date Amount Type of Improvement Date Amount
as a guide to help you keep track of im-
Heating & Air
provements to your home. Also see Keeping
Records, later. Additions: Conditioning:
Bedroom Heating system
Bathroom Central air conditioning
Energy conservation subsidy. If a public
utility gives you (directly or indirectly) a sub- Deck Furnace
sidy for the purchase or installation of an en- Garage Duct work
ergy conservation measure in your home after
1992, do not include the value of that subsidy Porch Central humidifier
in your income. You must reduce the basis Patio Filtration system
of your home by that value.
An energy conservation measure is an Storage shed Other
installation, or modification of an installation, Fireplace
that is primarily designed to reduce con-
sumption of electricity or natural gas or to Other Electrical:
improve the management of energy demand. Lighting fixtures
Lawn & Grounds: Wiring upgrades
Fences Water heater
Retaining wall Soft water system
Sprinkler system Filtration system
Swimming pool Other
Satellite dish Floors
Intercom Pipes and duct work
Security system Other
Storm windows and Built-in appliances
doors Kitchen modernization
Central vacuum modernization
www.irs.ustreas.gov. While visiting our Web not keep a record of any taxpayer's name
Site, you can select: or tax identification number.
Keeping Records • We sometimes record telephone calls to
• Frequently Asked Tax Questions to find
Keeping full and accurate records is evaluate IRS assistors objectively. We
answers to questions you may have.
vital to properly report your income hold these recordings no longer than one
RECORDS and expenses, to support your de- • Fill-in Forms to complete tax forms on- week and use them only to measure the
ductions, and to know the basis or adjusted line. quality of assistance.
basis of your home. These records include • Forms and Publications to download • We value our customers' opinions.
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How to keep records. How you keep rec- hot tax issues and news. at many post offices, libraries, and
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8396 ....................................... 6 Local benefits, assessments for .. 3 Mortgage interest ............... 3, 6
A Free tax services ....................... 10 Real estate taxes ................... 2
Abstract fees ............................... 8 Repairs ........................................ 8
Adjusted basis ............................. 8
For local benefits .................... 3 G MCC (Mortgage credit certificate) 6
Homeowners association ....... 3 Gift of home ................................. 8 Minister's or military housing allow- S
Attorney's fees ............................. 8 Ground rent ................................. 3 ance ........................................ 2 Settlement or closing costs:
More information ....................... 10 Basis of home ........................ 7
Mortgage credit certificate (MCC) 6 Mortgage interest ................... 4
B H Mortgage insurance premiums .... 8
Real estate taxes ............... 2, 7
Home: Stamp taxes ............................ 3, 8
Basis ............................................ 7 Credit ...................................... 6 Statement, mortgage interest ...... 4
Inherited ................................. 8
Mortgage interest ................... 3 Deduction ............................... 3 Surveys, cost of ........................... 8
Purchase of ............................ 7 Late payment charge ............. 3
C Received as gift ..................... 8 Paid at settlement .................. 4
Certificate, mortgage credit ......... 6 Refund ................................ 3, 6
Charges to install utility service .. 8
Homeowners association, assess-
ments ...................................... 3 Statement ............................... 4 T
Mortgage prepayment penalty .... 3 Tax help ..................................... 10
Construction ................................ 7 House payment ........................... 2 Taxes:
Cooperatives ............................... 3 Housing allowance, minister or mil- Real estate ............................. 2
Cost basis .................................... 7 itary ......................................... 2 Transfer and stamp ................ 8
Credit, mortgage interest ............. 6 N Title insurance ............................. 8
Nondeductible payments ......... 2, 8 Transfer taxes ......................... 3, 8
D Improvements .............................. 8
Home mortgage interest ........ 3
Insurance ................................. 2,
Points ........................................... 4 Utility service, charges to install .. 8
Real estate taxes ................... 2 Interest: Prepaid interest ........................... 3
Home mortgage ..................... 3
Prepaid ................................... 3
Escrow accounts ......................... 2
R VA funding fees ........................... 8
Real estate taxes:
K Deductible taxes ..................... 2
Keeping records ........................ 10 Paid at settlement or
F closing ........................... 2, 7 W
Fire insurance premiums ............. 8 Refund or rebate .................... 2 What you can and cannot deduct 2
Form: L Recordkeeping .......................... 10
1098 ....................................... 4 Late payment charge .................. 3 Refund of: