Tax Information for First-Time Homeowners by ves88494

VIEWS: 6 PAGES: 12

									                                         Contents
             Publication 530             Introduction ........................................        1
             Cat. No. 15058k
Department                               What You Can and Cannot Deduct ..                            2
of the
Treasury     Tax                           Real Estate Taxes ..........................
                                           Home Mortgage Interest .................
                                                                                                      2
                                                                                                      3

Internal                                 Mortgage Interest Credit ...................                 6
Revenue
Service      Information for               Figuring the Credit ..........................

                                         Basis ....................................................
                                                                                                      6

                                                                                                      7

             First-Time                    Figuring Your Basis ........................
                                           Adjusted Basis ................................
                                                                                                      7
                                                                                                      9


             Homeowners                  Keeping Records ................................

                                         How To Get More Information ..........
                                                                                                      9

                                                                                                      9

                                         Index ....................................................   12

             For use in preparing

             1999              Returns   Important Changes
                                         for 1999
                                         Pending legislation. Legislation affecting
                                         the mortgage interest credit was pending
                                         at the time of printing. For guidance, visit the
                                         IRS's web site at www.irs.gov or see the
                                         Form 8396 instructions. Publication 553,
                                         Highlights of 1999 Tax Changes, will also
                                         contain information about this and other tax
                                         law changes.

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                                         Important Reminder
                                         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
                                         $126,600 ($63,300 if you are married filing
                                         separately). For more information, see the
                                         instructions for Schedule A (Form 1040).



                                         Introduction
                                         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
                                         apartment.
                                              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
                                               tax return.
                                            • 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 adjust-          Your house payment. If you took out a                 Division of real estate taxes. For federal
    ments to the basis of your home. (Your        mortgage (loan) to finance the purchase of        income tax purposes, the seller is treated as
    home's basis generally is what it costs;      your home, you probably have to make              paying the property taxes up to, but not in-
    adjustments include the cost of any im-       monthly house payments. Your house pay-           cluding, the date of sale. You (the buyer) are
    provements you might make.)                   ment may include several costs of owning a        treated as paying the taxes beginning with the
                                                  home. The only costs you can deduct are real      date of sale. This applies regardless of the
  • What records you should keep as proof         estate taxes actually paid to the taxing au-      lien dates under local law. Generally, this in-
    of the basis and adjusted basis.              thority and interest that qualifies as home       formation is included on the settlement state-
                                                  mortgage interest. These are discussed in         ment you get at closing.
District of Columbia first-time homebuyer         more detail later.                                    You and the seller each are considered to
credit. You may be able to claim a one-time          Here are some items, which may be in-          have paid your own share of the taxes, even
tax credit of up to $5,000 if you buy a main      cluded in your house payment, that cannot         if one or the other paid the entire amount. You
home in the District of Columbia. You must        be deducted.                                      can each deduct your own share, if you
reduce the basis of your home by the amount                                                         itemize deductions, for the year the property
of the credit you claimed. Only purchases af-       • Fire or homeowner's insurance premi-          is sold.
ter August 4, 1997, and before January 1,             ums.
2001, qualify for this credit.                                                                          Example. You bought your home on
    You qualify for the credit if you (and your
                                                    • FHA mortgage insurance premiums.              September 1. The property tax year (the pe-
spouse if you are married) did not have an          • The amount applied to reduce the princi-      riod to which the tax relates) in your area is
ownership interest in a main home in the              pal of the mortgage.                          the calendar year. The tax for the year was
District of Columbia for at least 1 year before                                                     $730 and was due and paid by the seller on
buying the new home. Individuals with modi-                                                         August 15.
                                                  Minister's or military housing allowance.
fied adjusted gross income of $90,000 or                                                                You owned your new home during the real
                                                  If you are a minister or a member of the uni-
more ($130,000 or more in the case of a joint                                                       property tax year for 122 days (September 1
                                                  formed services and receive a housing al-
return) cannot claim the credit. Individuals                                                        to December 31, including your date of pur-
                                                  lowance that is not taxable, you can still de-
with modified adjusted gross income between                                                         chase). You figure your deduction for real
                                                  duct your real estate taxes and your home
$70,000 and $90,000 ($110,000 and                                                                   estate taxes on your home as follows.
                                                  mortgage interest. You do not have to reduce
$130,000 in the case of a joint return) can       your deductions by your nontaxable allow-         1.   Enter the total real estate taxes for the
claim only a reduced credit.                      ance.                                                  real property tax year ..........................          $730
    Use Form 8859, District of Columbia                                                             2.   Enter the number of days in the real
First-Time Homebuyer Credit, to figure your                                                              property tax year that you owned the
                                                  Nondeductible payments. You cannot de-                 property ...............................................     122
credit. See the form and its instructions for
                                                  duct any of the following items.                  3.   Divide line 2 by 365 ............................          .3342
more information.
                                                                                                    4.   Multiply line 1 by line 3. This is your
                                                    • Insurance, including fire and comprehen-           deduction. Enter it on line 6 of Sched-
Useful Items                                          sive coverage, and title and mortgage              ule A (Form 1040) ...............................          $244
You may want to see:                                  insurance.
                                                    • Wages you pay for domestic help.                  You can deduct $244 on your return for
 Publication                                                                                        the year if you itemize your deductions. You
                                                    • Depreciation.                                 are considered to have paid this amount and
    523    Selling Your Home                        • The cost of utilities, such as gas, elec-     can deduct it on your return even if, under the
                                                      tricity, or water.                            contract, you did not have to reimburse the
    527    Residential Rental Property                                                              seller.
                                                    • Certain settlement costs. See Items not           Delinquent taxes. Delinquent taxes are
    547    Casualties, Disasters, and Thefts          added to basis and not deductible, under      unpaid taxes that were imposed on the seller
                                                      Cost as Basis, later, for more information.   for an earlier tax year. If you agree to pay
    551    Basis of Assets
                                                                                                    delinquent taxes when you buy your home,
    555    Community Property                                                                       you cannot deduct them. You treat them as
                                                  Real Estate Taxes                                 part of the cost of your home. See Real estate
    587    Business Use of Your Home              Most state and local governments charge an        taxes, later, under Cost as Basis.
    936    Home Mortgage Interest De-             annual tax on the value of real property. This
           duction                                is called a real estate tax. You can deduct       Escrow accounts. Many monthly house
                                                  the tax if it is based on the assessed value      payments include an amount placed in
                                                  of the real property and the taxing authority     escrow (put in the care of a third party) for real
 Form (and Instructions)                          charges a uniform rate on all property in its     estate taxes. You may not be able to deduct
                                                  jurisdiction. The tax must be for the welfare     the total you pay into the escrow account. You
    8396 Mortgage Interest Credit                 of the general public and not be a payment        can deduct only the real estate taxes that the
   See How To Get More Information, near          for a special privilege granted or service ren-   lender actually paid from escrow to the taxing
the end of this publication, for information      dered to you.                                     authority. Your real estate tax bill will show
about getting these publications and this form.                                                     this amount.
                                                  Deductible Taxes                                  Refund or rebate of real estate taxes. If
                                                  You can deduct real estate taxes imposed on       you receive a refund or rebate of real estate
                                                  you. You must have paid them either at            taxes this year for amounts you paid this year,
What You Can and                                  settlement or closing, or to a taxing authority   you must reduce your real estate tax de-
                                                  (either directly or through an escrow account)    duction by the amount refunded to you. If the
Cannot Deduct                                     during the year. If you own a cooperative         refund or rebate was for real estate taxes paid
                                                  apartment, see Special Rules for Cooper-          for a prior year, you may have to include
To deduct expenses of owning a home, you
                                                  atives, later.                                    some or all of the refund in your income. For
must file Form 1040 and itemize your de-
ductions on Schedule A (Form 1040). If you                                                          more information, see Recoveries in Publica-
itemize, you cannot take the standard de-         Where to deduct real estate taxes. Enter          tion 525, Taxable and Nontaxable Income.
duction. See the Form 1040 instructions if you    the amount of your deductible real estate
have questions about whether to itemize your      taxes on line 6 of Schedule A (Form 1040).
                                                                                                    Real Estate Items You
deductions or claim the standard deduction.
    This section explains what expenses you       Real estate taxes paid at settlement or           Cannot Deduct
can deduct as a homeowner. It also points         closing. Real estate taxes are generally di-      The following items are not deductible as real
out expenses that you cannot deduct. There        vided so that you and the seller each pay         estate taxes.
are two primary discussions: real estate taxes    taxes for the part of the property tax year you
and home mortgage interest. Generally, your       owned the home. Your share of these taxes         Charges for services. An itemized charge
real estate taxes and home mortgage interest      is fully deductible, if you itemize your de-      for services to specific property or people is
are included in your house payment.               ductions.                                         not a tax, even if the charge is paid to the
Page 2
taxing authority. You cannot deduct the                   house, apartment, or house trailer             Refund of home mortgage interest. If you
charge as a real estate tax if it is:                     owned or leased by the corporation.            receive a refund of home mortgage interest
                                                                                                         that you deducted in an earlier year and that
 1) A unit fee for the delivery of a service          3) No stockholder can receive any distribu-        reduced your tax, you generally must include
    (such as a $5 fee charged for every                  tion out of capital, except on a partial or     the refund in income in the year you receive
    1,000 gallons of water you use),                     complete liquidation of the corporation.        it. For more information, see Recoveries in
                                                      4) The tenant-stockholders pay at least            Publication 525. The amount of the refund
 2) A periodic charge for a residential ser-
                                                         80% of the corporation's gross income           will usually be shown on the mortgage inter-
    vice (such as a $20 per month or $240
                                                         for the tax year. For this purpose, gross       est statement you receive from your mortgage
    annual fee charged for trash collection),
                                                         income means all income received dur-           lender. See Mortgage Interest Statement,
    or
                                                         ing the entire tax year, including any re-      later.
 3) A flat fee charged for a single service              ceived before the corporation changed
    provided by your local government (such              to cooperative ownership.
    as a $30 charge for mowing your lawn
                                                                                                         Deductible Mortgage Interest
    because it had grown higher than per-                                                                To be deductible, the interest you pay must
                                                     Tenant-stockholders. A tenant-stockholder           be on a loan secured by your main home or
    mitted under a local ordinance).                 can be any entity (such as a corporation,           a second home. The loan can be a first or
                                                     trust, estate, partnership, or association) as      second mortgage, a home improvement loan,
         You must look at your real estate tax       well as an individual. The tenant-stockholder
  !      bill to decide if any nondeductible
 CAUTION itemized charges, such as those just
                                                     does not have to live in any of the cooper-
                                                                                                         or a home equity loan.
                                                     ative's dwelling units. The units that the
listed, are included in the bill. If your taxing     tenant-stockholder has the right to occupy          Prepaid interest. If you pay interest in ad-
authority (or lender) does not furnish you a         can be rented to others.                            vance for a period that goes beyond the end
copy of your real estate tax bill, ask for it.                                                           of the tax year, you must spread this interest
                                                                                                         over the tax years to which it applies. You can
                                                     Deductible taxes. You figure your share of
Assessments for local benefits. You can-                                                                 deduct in each year only the interest that
                                                     real estate taxes in the following way.
not deduct amounts you pay for local benefits                                                            qualifies as home mortgage interest for that
that tend to increase the value of your prop-                                                            year. However, there is an exception. See the
                                                      1) Divide the number of your shares of
erty. Local benefits include the construction                                                            discussion on Points, later.
                                                         stock by the total number of shares out-
of streets, sidewalks, or water and sewer                standing, including any shares held by
systems. You must add these amounts to the               the corporation.                                Late payment charge on mortgage pay-
basis of your property.                                                                                  ment. You can deduct as home mortgage
    You can, however, deduct assessments              2) Multiply the corporation's deductible real      interest a late payment charge if it was not for
(or taxes) for local benefits if they are for            estate taxes by the number you figured          a specific service in connection with your
maintenance, repair, or interest charges re-             in (1). This is your share of the real es-      mortgage loan.
lated to those benefits. An example is a                 tate taxes.
charge to repair an existing sidewalk and any
interest included in that charge.                        Generally, your share of the corporation's      Mortgage prepayment penalty. If you pay
    If only a part of the assessment is for          real estate tax is the amount the corporation       off your home mortgage early, you may have
maintenance, repair, or interest charges, you        gives you. It must reasonably reflect the cost      to pay a penalty. You can deduct that penalty
must be able to show the amount of that part         of real estate taxes for your dwelling unit.        as home mortgage interest provided the
to claim the deduction. If you cannot show               Refund of real estate taxes. If the cor-        penalty is not for a specific service performed
what part of the assessment is for mainte-           poration receives a refund of real estate taxes     or cost incurred in connection with your
nance, repair, or interest charges, you cannot       it paid in an earlier year, it must reduce the      mortgage loan.
deduct any of it.                                    amount of real estate taxes paid this year
    An assessment for a local benefit may be         when it allocates the tax expense to you. Your      Ground rent. In some states (such as
listed as an item in your real estate tax bill. If   deduction for real estate taxes the corporation     Maryland), you may buy your home subject
so, use the rules in this section to find how        paid this year is reduced by your share of the      to a ground rent. A ground rent is an obli-
much of it, if any, you can deduct.                  refund the corporation received.                    gation you assume to pay a fixed amount per
                                                                                                         year on the property. Under this arrange-
Transfer taxes (or stamp taxes). You can-                                                                ment, you are leasing (rather than buying) the
not deduct transfer taxes and similar taxes          Home Mortgage Interest                              land on which your home is located.
and charges on the sale of a personal home.          This section of the publication gives you basic         Redeemable ground rents. If you make
If you are the buyer and you pay them, in-           information about home mortgage interest,           annual or periodic rental payments on a
clude them in the cost basis of the property.        including information on interest paid at           redeemable ground rent, you can deduct the
If you are the seller and you pay them, they         settlement, points, and Form 1098, Mortgage         payments as mortgage interest. The ground
are expenses of the sale and reduce the              Interest Statement.                                 rent is a redeemable ground rent only if all
amount realized on the sale.                             Most home buyers take out a mortgage            of the following are true.
                                                     (loan) to buy their home. They then make
                                                     monthly house payments to either the mort-           1) Your lease, including renewal periods, is
Homeowners association assessments.                                                                          for more than 15 years.
You cannot deduct these assessments be-              gage holder or someone collecting the pay-
cause the homeowners association imposes             ments for the mortgage holder. (See Your             2) You can freely assign the lease.
them rather than a state or local government.        house payment, earlier, under What You Can
                                                     and Cannot Deduct.)                                  3) You have a present or future right (under
                                                         Usually, you can deduct the entire part of          state or local law) to end the lease and
Special Rules for Cooperatives                       your house payment that is for mortgage in-             buy the lessor's entire interest in the land
If you own a cooperative apartment, some             terest, if you itemize your deductions on               by paying a specified amount.
special rules apply to you, though you gen-          Schedule A (Form 1040). However, your de-
                                                     duction may be limited if:                           4) The lessor's interest in the land is pri-
erally receive the same tax treatment as other
                                                                                                             marily a security interest to protect the
homeowners. As an owner of a cooperative
                                                      1) Your total mortgage balance is more                 rental payments to which he or she is
apartment, you own shares of stock in a cor-
                                                         than $1 million ($500,000 if married filing         entitled.
poration that owns or leases housing facilities.
You can deduct your share of the corpo-                  separately), or
                                                                                                            Payments made to end the lease and to
ration's deductible real estate taxes if the
                                                      2) You took out a mortgage for reasons             buy the lessor's entire interest are not
cooperative housing corporation meets all
                                                         other than to buy, build, or improve your       redeemable ground rents. You cannot deduct
of the following conditions.
                                                         home.                                           them.
 1) The corporation has only one class of                                                                   Nonredeemable ground rents.         Pay-
    stock outstanding.                               If either of these situations applies to you, you   ments on a nonredeemable ground rent are
                                                     will need to get Publication 936. You may also      not mortgage interest. You can deduct them
 2) Each stockholder, solely because of              need Publication 936 if you later refinance         as rent if they are a business expense or if
    ownership of the stock, can live in a            your mortgage or buy a second home.                 they are for rental property.
                                                                                                                                                 Page 3
Cooperative apartment. You can usually                  rately on the settlement statement, such        If you need information about the basis of
treat the interest on a loan you took out to buy        as appraisal fees, inspection fees, title    your home, see Publication 523.
stock in a cooperative housing corporation as           fees, attorney fees, and property taxes.
home mortgage interest if you own a cooper-                                                          Funds provided are less than points. If you
ative apartment and the cooperative housing         6) You use your loan to buy or build your
                                                                                                     meet all the tests in the Exception except that
corporation meets the conditions described             main home.
                                                                                                     the funds you provided were less than the
earlier under Special Rules for Cooperatives.       7) The points were computed as a per-            points charged to you (test 9), you can deduct
In addition, you can treat as home mortgage            centage of the principal amount of the        the points in the year paid up to the amount
interest your share of the corporation's               mortgage.                                     of funds you provided. In addition, you can
deductible mortgage interest. Figure your                                                            deduct any points paid by the seller.
share of mortgage interest the same way that        8) The amount is clearly shown on the
is shown for figuring your share of real estate        settlement statement (such as the Uni-           Example 1.       When you took out a
taxes. For more information on cooperatives,           form Settlement Statement, Form               $100,000 mortgage loan to buy your home in
see Special Rule for Tenant-Stockholders in            HUD-1) as points charged for the mort-        December, you were charged one point
Cooperative Housing Corporations in Publi-             gage. The points may be shown as paid         ($1,000). You meet all the tests for deducting
cation 936.                                            from either your funds or the seller's.       points in the Exception, except the only funds
    Refund of cooperative's mortgage in-                                                             you provided were a $750 down payment.
                                                    9) The funds you provided at or before           Of the $1,000 you were charged for points,
terest. You must reduce your mortgage in-              closing, plus any points the seller paid,
terest deduction by your share of any cash                                                           you can deduct $750 in the year paid. You
                                                       were at least as much as the points           spread the remaining $250 over the life of the
portion of a patronage dividend that the co-           charged. The funds you provided do not
operative receives. The patronage dividend                                                           mortgage.
                                                       have to have been applied to the points.
is a partial refund to the cooperative housing         They can include a down payment, an
corporation of mortgage interest it paid in a                                                            Example 2. The facts are the same as in
                                                       escrow deposit, earnest money, and            Example 1, except that the person who sold
prior year.                                            other funds you paid at or before closing
    If you receive a Form 1098 from the co-                                                          you your home also paid one point ($1,000)
                                                       for any purpose. You cannot have bor-         to help you get your mortgage. In the year
operative housing corporation, the form                rowed these funds from your lender or
should show only the amount you can deduct.                                                          paid, you can deduct $1,750 ($750 of the
                                                       mortgage broker.                              amount you were charged plus the $1,000
                                                                                                     paid by the seller). You must reduce the basis
Mortgage Interest                                      Home improvement loan. You can also           of your home by the $1,000 paid by the seller.
Paid at Settlement                                 fully deduct in the year paid points paid on a
                                                   loan to improve your main home, if state-         Excess points. If you meet all the tests in
One item that normally appears on a settle-
                                                   ments (1) through (5) are true.                   the Exception except that the points paid
ment or closing statement is home mortgage
                                                       Points not fully deductible in year paid.     were more than are generally paid in your
interest.
                                                   If you do not qualify under the exception to      area (test 3), you can deduct in the year paid
    You can deduct the interest that you pay
                                                   deduct the full amount of points in the year      only the points that are generally charged.
at settlement if you itemize your deductions
                                                   paid, see Points in chapter 8 of Publication      You must spread any additional points over
on Schedule A (Form 1040). This amount
                                                   535, Business Expenses, for the rules on          the life of the mortgage.
should be included in the mortgage interest
                                                   when and how much you can deduct.
statement provided by your lender. See the
discussion under Mortgage Interest State-                                                            Mortgage ending early. If you spread your
ment, later. Also, if you pay interest in ad-      Figure A. You can use Figure A as a quick         deduction for points over the life of the mort-
vance, see Prepaid interest, earlier, and          guide to see whether your points are fully        gage, you can deduct any remaining balance
Points, next.                                      deductible in the year paid.                      in the year the mortgage ends. A mortgage
                                                                                                     may end early due to a prepayment, refi-
Points                                             Amounts charged for services. Amounts             nancing, foreclosure, or similar event.
                                                   charged by the lender for specific services
The term “points” is used to describe certain      connected to the loan are not interest. Ex-           Example. Dan paid $3,000 in points in
charges paid, or treated as paid, by a bor-        amples of these charges are:                      1993 that he had to spread out over the
rower to obtain a home mortgage. Points                                                              15–year life of the mortgage. He had de-
may also be called loan origination fees,           1) Appraisal fees,                               ducted $1,200 of these points through 1998.
maximum loan charges, loan discount, or                                                                  Dan prepaid his mortgage in full in 1999.
discount points.                                    2) Notary fees,                                  He can deduct the remaining $1,800 of points
   A borrower is treated as paying any points                                                        in 1999.
                                                    3) Preparation costs for the mortgage note
that a home seller pays for the borrower's
                                                       or deed of trust,                                 Exception. If you refinance the mortgage
mortgage. See Points paid by the seller, later.
                                                    4) Mortgage insurance premiums, and              with the same lender, you cannot deduct any
General rule. You cannot deduct the full                                                             remaining points for the year. Instead, deduct
amount of points in the year paid. Because          5) VA funding fees.                              them over the term of the new loan.
they are prepaid interest, you generally must
deduct them over the life (term) of the mort-      You cannot deduct these amounts as points         Form 1098. The mortgage interest statement
gage.                                              either in the year paid or over the life of the   you receive should show not only the total
    Exception. You can fully deduct points         mortgage. For information about the tax           interest paid during the year, but also your
in the year paid if you meet all the following     treatment of these amounts and other settle-      deductible points. See Mortgage Interest
tests.                                             ment fees and closing costs, see Basis, later.    Statement, later.

 1) Your loan is secured by your main home.        Points paid by the seller.           The term
    (Your main home is the one you live in         “points” includes loan placement fees that the
                                                                                                     Where To Deduct
    most of the time.)                             seller pays to the lender to arrange financing    Home Mortgage Interest
                                                   for the buyer.                                    Enter on line 10 of your Schedule A (Form
 2) Paying points is an established business
                                                       Treatment by seller. The seller cannot        1040) the home mortgage interest and points
    practice in the area where the loan was
                                                   deduct these fees as interest. But they are a     reported to you on Form 1098 (discussed
    made.
                                                   selling expense that reduces the seller's         next). If you did not receive a Form 1098,
 3) The points paid were not more than the         amount realized. See Publication 523 for          enter your deductible interest on line 11, and
    points generally charged in that area.         more information.                                 any deductible points on line 12. See Table
                                                       Treatment by buyer. The buyer also re-        1 for a summary of where to deduct home
 4) You use the cash method of accounting.
                                                   duces the basis of the home by the amount         mortgage interest and real estate taxes.
    This means you report income in the
                                                   of the seller-paid points and treats the points       If you paid home mortgage interest to the
    year you receive it and deduct expenses
                                                   as if he or she had paid them. If all the tests   person from whom you bought your home,
    in the year you pay them. Most individ-
                                                   under the Exception are met, the buyer can        show that person's name, address, and social
    uals use this method.
                                                   deduct the points in the year paid. If any of     security number (SSN) or employer identifi-
 5) The points were not paid in place of           those tests is not met, the buyer deducts the     cation number (EIN) on the dotted lines next
    amounts that ordinarily are stated sepa-       points over the life of the loan.                 to line 11. The seller must give you this
Page 4
Figure A. Are My Points Fully Deductible This Year?

                                           Start Here:

                                                                                        No
               Is the loan secured by your main home?

                                                    Yes

                                                                                        No
               Is the payment of points an established business practice in
               your area?

                                                    Yes

                                                                                        Yes
               Were the points paid more than the amount generally charged
               in your area?

                                                    No

                                                                                        No
               Do you use the cash method of accounting?

                                                    Yes

                                                                                        Yes
               Were the points paid in place of amounts that ordinarily are
               separately stated on the settlement sheet?

                                                    No

        Yes
               Did you take out the loan to improve your main home?

                                                    No

                                                                                        No
               Did you take out the loan to buy or build your main home?

                                                    Yes

                                                                                        No
               Were the points computed as a percentage of the principal
               amount of the mortgage?

                                                    Yes


               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?*

                                                    Yes

                                                                                        No
               Is the amount paid clearly shown as points on the settlement
               statement?

                                                    Yes

                                                                                                  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.




                                                                                                                                                     Page 5
number and you must give the seller your            Table 1. Where To Deduct Interest and Taxes Paid on Your Home
SSN; Form W-9, Request for Taxpayer Iden-
                                                                 See the text for information on what expenses are eligible.
tification Number and Certification, can be
used for this purpose. Failure to meet either
                                                             IF you are eligible to deduct . . .                   THEN report the amount
of these requirements may result in a $50
penalty for each failure.                                                                                       on Schedule A (Form 1040) . . .

                                                      Real estate taxes                                                      line 6
Mortgage Interest Statement                           Home mortgage interest and points                                      line 10
If you paid $600 or more of mortgage interest         reported on Form 1098
(including certain points) during the year on
any one mortgage to a mortgage holder in the          Home mortgage interest not reported on                                 line 11
course of that holder's trade or business, you        Form 1098
should receive a Form 1098, Mortgage In-
terest Statement, or similar statement from           Points not reported on Form 1098                                       line 12
the mortgage holder. The statement will show
the total interest paid on your mortgage dur-
ing the year. If you bought a main home                                                                 you paid during the year on your mortgage
                                                                                                        by the following fraction.
during the year, it will also show the deduct-
ible points you paid and any points you can         Mortgage Interest                                     Certified indebtedness amount on your MCC
deduct that were paid by the person who sold
you your home. See Points, earlier.
                                                    Credit                                                      Original amount of your mortgage

    The interest you paid at settlement should      The mortgage interest credit is intended to         This fraction, which you may change to a
be included on the statement. If it is not, add     help lower-income individuals afford home           percentage, will not change as long as you
the interest from the settlement sheet that         ownership. The tax credit is allowed each           can take the credit.
qualifies as home mortgage interest to the          year for part of the home mortgage interest
total shown on Form 1098 or similar state-          they pay.                                               Example.      Emily's mortgage loan is
ment. Put the total on line 10 of Schedule A            To be eligible for the credit, you must get     $50,000. The certified indebtedness amount
(Form 1040) and attach a statement to your          a mortgage credit certificate (MCC) from            on her MCC is $40,000. She paid $4,000 in-
return explaining the difference. Write “See        your state or local government. Generally, an       terest in this year. Emily figures the interest
attached” next to line 10.                          MCC is issued only in connection with a new         to enter on line 1 of Form 8396 as follows:
    A mortgage holder can be a financial in-        mortgage for the purchase of your main                         $40,000
stitution, a governmental unit, or a cooper-        home.                                                                    = 80% (.80)
                                                        The MCC will show the certificate credit                   $50,000
ative housing corporation. If a statement
comes from a cooperative housing corpo-             rate you will use to figure your credit. It will               $4,000      .80 = $3,200
ration, it will generally show your share of in-    also show the certified indebtedness amount
terest.                                             on which the interest is eligible for the credit.   Emily enters $3,200 on line 1 of Form 8396.
    You should receive your mortgage interest                                                           In each later year, she will figure her credit
statement for each year by January 31 of the               You must contact the appropriate
                                                     TIP government agency about getting an             using only 80% of the interest she pays for
following year. A copy of this form will also                                                           that year.
be sent to the IRS.                                        MCC before you get a mortgage and
                                                    buy your home. Contact your state or local
                                                    housing finance agency for information about        Limits
    Example. You bought a new home on               the availability of MCCs in your area.              Two limits may apply to your credit:
May 3. You paid no points on the purchase.
During the year, you made mortgage pay-                                                                  1) A limit based on the credit rate, and
                                                    Claiming the credit. To claim the credit,
ments which included $1,872 deductible in-
                                                    complete Form 8396 and attach it to your             2) A limit based on your tax.
terest on your new home. The settlement
                                                    Form 1040. Include the credit in your total for
sheet for the purchase of the home included
                                                    line 47 of Form 1040, and check box b.              Limit based on credit rate. If the certificate
interest of $232 for 29 days in May. The
mortgage statement you receive from the                                                                 credit rate is higher than 20%, the credit
lender includes total interest of $2,104            Reducing your home mortgage interest                cannot be more than $2,000.
($1,872 + $232). You can deduct the $2,104          deduction. If you itemize your deductions
if you itemize your deductions.                     on Schedule A (Form 1040), reduce your              Limit based on tax. Your credit (after ap-
                                                    home mortgage interest deduction by the             plying the limit based on the credit rate) can-
                                                    amount of the mortgage interest credit.             not be more than your regular tax liability on
Refund of overpaid interest. If you receive                                                             line 40 of Form 1040 reduced by any credits
a refund of mortgage interest you overpaid in       Selling your home. If you purchase a home           claimed on lines 41 through 44 of Form 1040.
a prior year, you generally will receive a Form     after 1990 using an MCC, and you sell that
1098 showing the refund in box 3. See Re-                                                                       Legislation affecting this limit was
                                                    home within 9 years, you will have to recap-
fund of home mortgage interest, earlier, under      ture (repay) a portion of the credit. For addi-       !     pending at the time of printing. For
                                                                                                        CAUTION guidance, visit the IRS's web site at
Home Mortgage Interest.                             tional information, see Publication 523.
                                                                                                        www.irs.gov or see the Form 8396 in-
                                                                                                        structions. Publication 553, Highlights of 1999
                                                                                                        Tax Changes, will also contain information
More than one borrower. If you and at least         Figuring the Credit                                 about this and other tax law changes.
one other person (other than your spouse if         Figure your credit on Form 8396.
you file a joint return) were liable for and paid
interest on a mortgage that was for your                                                                Dividing the Credit
home, and the other person received a Form          Mortgage not more than certified indebt-
                                                    edness. If your mortgage is equal to (or            If two or more persons (other than a married
1098 showing the interest that was paid dur-                                                            couple filing a joint return) hold an interest in
ing the year, attach a statement to your return     smaller than) the certified indebtedness
                                                    amount shown on your MCC, enter on line 1           the home to which the MCC relates, the credit
explaining this. Show how much of the inter-                                                            must be divided based on the interest held
est each of you paid, and give the name and         of Form 8396 all the interest you paid on your
                                                    mortgage during the year.                           by each person.
address of the person who received the form.
Deduct your share of the interest on line 11                                                                Example. John and his brother, George,
of Schedule A (Form 1040), and write “See           Mortgage more than certified indebt-                were issued an MCC. They used it to get a
attached” next to the line.                         edness. If your mortgage is larger than the         mortgage on their main home. John has a
                                                    certified indebtedness amount shown on your         60% ownership interest in the home, and
                                                    MCC, you can figure the credit on only part         George has a 40% ownership interest in the
                                                    of the interest you paid. To find the amount        home. John paid $5,400 mortgage interest
                                                    to enter on line 1, multiply the total interest     this year and George paid $3,600.
Page 6
    The MCC shows a credit rate of 25% and           Table 2. Effect of Refinancing on Your Credit
a certified indebtedness amount of $65,000.
The loan amount (mortgage) on their home               IF you get a new (reissued) MCC and the          THEN the interest you claim on
is $60,000. Because the credit rate is more            amount of your new mortgage is . . .             Form 8396, line 1, is . . .
than 20%, the credit is limited to $2,000.
    John figures the credit by multiplying the         Smaller than or equal to the certificate         All the interest paid during the year on your
mortgage interest he paid this year ($5,400)           indebtedness amount on the new MCC               new mortgage*
by the certificate credit rate (25%) for a total
of $1,350. His credit is limited to $1,200             Larger than the certificate indebtedness on      Interest paid during the year on your new
($2,000 × 60%).
                                                       the new MCC                                      mortgage multiplied by the following fraction.
    George figures the credit by multiplying
the mortgage interest he paid in this year                                                                        Certificate indebtedness on
($3,600) by the certificate credit rate (25%) for                                                                        your new MCC
a total of $900. His credit is limited to $800                                                                 Original amount of your mortgage
($2,000 × 40%).
                                                     * The credit using the new MCC cannot be more than the credit using the old MCC. See New MCC
Carryforward                                           cannot increase your credit.
If your allowable credit is reduced because
of the limit based on your tax, you can carry        3 of the form, and write “See attached” on the     cause you must keep track of your basis and
forward the unused portion of the credit to the      dotted line.                                       adjusted basis during the period you own your
next 3 years or until used, whichever comes                                                             home. You must also keep records of the
first.                                               New MCC cannot increase your credit.               events that affect basis or adjusted basis. See
                                                     The credit that you claim with your new MCC        Keeping Records, later.
    Example. You receive a mortgage credit           cannot be more than the credit that you could
certificate from State X. This year, your tax        have claimed with your old MCC.
liability is $1,100, your tentative minimum tax          In most cases, the agency that issues your     Figuring Your Basis
is zero, and your mortgage interest credit is        new MCC will make sure that it does not in-        How you figure your basis depends on how
$1,700. You claim no other credits. Your un-         crease your credit. However, if either your old    you acquire your home. If you buy or build
used mortgage interest credit for this year is       loan or your new loan has a variable (adjust-      your home, your cost is your basis. If you
$600 ($1,700 − $1,100). You can carry for-           able) interest rate, you will need to check this   receive your home as a gift, your basis is
ward this amount to the next 3 years.                yourself. In that case, you will need to know      usually the adjusted basis that the person
                                                     the amount of the credit you could have            who gave you the home had. If you inherit
Credit rate more than 20%. If you are sub-           claimed using the old MCC.                         your home, the fair market value at that time
ject to the $2,000 limit because your certif-            There are two methods for figuring the         is generally your basis. Each of these topics
icate credit rate is more than 20%, you cannot       credit you could have claimed. Under one           is discussed later.
carry forward any amount more than $2,000            method, you figure the actual credit that
(or your share of the $2,000 if you must divide      would have been allowed. This means you            Fair market value. Fair market value is the
the credit).                                         use the credit rate on the old MCC and the         price that property would sell for on the open
                                                     interest you would have paid on the old loan.      market. It is the price that would be agreed
    Example. In the earlier example under                                                               on between a willing buyer and a willing
                                                         If your old loan was a variable rate mort-
Dividing the Credit, John and George used                                                               seller, with neither having to buy or sell, and
                                                     gage, you can use another method to deter-
the entire $2,000 credit. The excess $150 for                                                           both having reasonable knowledge of the
                                                     mine the credit that you could have claimed.
John ($1,350 − $1,200) and $100 for George                                                              relevant facts.
                                                     Under this method, you figure the credit using
($900 − $800) cannot be carried forward to
                                                     a payment schedule of a hypothetical self-
future years, despite the tax liabilities for John
                                                     amortizing mortgage with level payments            Property transferred from a spouse. If your
and George.
                                                     projected to the final maturity date of the old    home is transferred to you from your spouse,
                                                     mortgage. The interest rate of the hypothet-       or from your former spouse as a result of a
                                                     ical mortgage is the annual percentage rate        divorce, your basis is the same as the trans-
Refinancing                                          (APR) of the new mortgage for purposes of          feror's adjusted basis just before the transfer.
If you refinance your original mortgage loan         the Federal Truth in Lending Act. The prin-        Publication 504, Divorced or Separated Indi-
on which you had been given an MCC, you              cipal of the hypothetical mortgage is the re-      viduals, fully discusses transfers between
must get a new MCC to be able to claim the           maining outstanding balance of the certified       spouses.
credit on the new loan. And the amount of            mortgage indebtedness shown on the old
credit you can claim on the new loan may             MCC.
change. Table 2 summarizes how to figure                                                                Cost as Basis
your credit if you refinance your original                   You must choose one method and             The cost of your home, whether you pur-
mortgage loan.                                         !     use it consistently beginning with the
                                                     CAUTION first tax year for which you claim the
                                                                                                        chased it or constructed it, is the amount you
                                                                                                        paid for it, including any debt you assumed.
    An issuer may reissue an MCC after you
refinance your mortgage, but only up to one          credit based on the new MCC.                           The cost of your home includes most
year after the date of the refinancing. If you                                                          settlement or closing costs you paid when you
did not get a new MCC, you may want to                       As part of your tax records, you           bought the home. If you built your home, your
contact the state or local housing finance            TIP should keep your old MCC and the              cost includes most closing costs paid when
agency that issued your original MCC for in-                schedule of payments for your old           you bought the land or settled on your mort-
formation about whether you can get a reis-          mortgage.                                          gage.
sued MCC.
                                                                                                        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-                                                            cludes your down payment and any debt you
est paid on the old mortgage and the appli-                                                             assumed. The basis of a cooperative apart-
cable amount of interest paid on the new             Basis                                              ment is the amount you paid for your shares
mortgage, and enter the total on line 1 of           Basis is your starting point for figuring a gain   in the corporation that owns or controls the
Form 8396.                                           or loss if you later sell your home, or for fig-   property. This amount includes any purchase
    If your new MCC has a credit rate different      uring depreciation if you later use part of your   commissions or other costs of acquiring the
from the rate on the old MCC, you must at-           home for business purposes or for rent.            shares.
tach a statement to Form 8396. The state-                 While you own your home, you may add
ment must show the calculation for lines 1,          certain items to your basis. You may subtract      Construction. If you contracted to have your
2, and 3 for the part of the year when the old       certain other items from your basis. These         home built on land that you own, your basis
MCC was in effect. It must show a separate           items are called adjustments to basis and are      in the home is your basis in the land plus the
calculation for the part of the year when the        explained later under Adjusted Basis.              amount you paid to have the home built. This
new MCC was in effect. Combine the                       It is important that you understand these      includes the cost of labor and materials, the
amounts of each line 3, enter the total on line      terms when you first acquire your home be-         amount you paid the contractor, any archi-
                                                                                                                                                  Page 7
tect's fees, building permit charges, utility      Table 3. Adjusted Basis
meter and connection charges, and legal fees                    This table summarizes items that will generally increase or decrease your basis in
that are directly connected with building your                  your home.
home. If you built all or part of your home
yourself, your basis is the total amount it cost
you to build it. You cannot include the value        Increases to Basis                                Decreases to Basis
of your own labor or any other labor you did
not pay for.                                         Improvements:                                     Insurance reimbursement for casualty
                                                      Putting an addition on your home                 losses
Real estate taxes. Real estate taxes are              Replacing an entire roof
usually divided so that you and the seller each       Paving your driveway                             Deductible casualty loss not covered by
pay taxes for the part of the property tax year       Installing central air conditioning              insurance
that each owned the home. See the earlier             Rewiring your home
discussion of Real estate taxes paid at                                                                Payment received for easement or
settlement or closing, under Real Estate             Assessments for local improvements                right-of-way granted
Taxes, to figure the real estate taxes you paid      (see Assessments for local benefits)
or are considered to have paid.                                                                        Depreciation deduction if home is used
    If you pay any part of the seller's share        Amounts spent to restore damaged property         for business or rental purposes
of the real estate taxes (the taxes up to the
date of sale), and the seller did not reimburse                                                        Value of energy conservation subsidy
you, add those taxes to your basis in the
home. You cannot deduct them as taxes paid.
    If the seller paid any of your share of the    the year you buy your home if you itemize               c)    Cost of a credit report, and
real estate taxes (the taxes beginning with the    your deductions. You can add certain other
date of sale), you can still deduct those taxes.   settlement or closing costs to the basis of             d)    Fee for an appraisal required by a
If you did not reimburse the seller, you must      your home.                                                    lender.
reduce your basis by the amount of those               Items added to basis. You can include
taxes.                                             in your basis the settlement fees and closing          Points paid by seller. If you bought your
                                                   costs that are for buying your home. A fee is       home after April 3, 1994, you must reduce
    Example 1. You bought your home on             for buying the home if you would have had to        your basis by any points paid for your mort-
September 1. The property tax year in your         pay it even if you paid cash for the home.          gage by the person who sold you your home.
area is the calendar year, and the tax is due          The following are some of the settlement           If you bought your home after 1990 but
on August 15. The real estate taxes on the         fees and closing costs that you can include         before April 4, 1994, you must reduce your
home you bought were $730 for the year and         in the original basis of your home.                 basis by seller-paid points only if you de-
had been paid by the seller on August 15.                                                              ducted them. See Points, earlier, for the rules
You did not reimburse the seller for your            • Abstract fees (abstract of title fees).         on deducting points.
share of the real estate taxes from September
1 through December 31. You must reduce the           • Charges for installing utility services.
basis of your home by the $244 [(122 ÷ 365)                                                            Gift
                                                     • Legal fees (including fees for the title
× $730] the seller paid for you. You can de-
                                                       search and preparation of the sales con-        If someone gave you your home, your basis
duct your $244 share of real estate taxes on
                                                       tract and deed).                                is the same as the person's (the donor's) ad-
your return for the year you purchased your
home.                                                • Recording fees.                                 justed basis (defined later) when it was given
                                                                                                       to you. However, your basis in the home for
                                                     • Surveys.                                        determining a loss on its sale is the lesser of
    Example 2. You bought your home on                                                                 the fair market value of the home when it was
May 3, 1999. The property tax year in your           • Transfer taxes.
                                                                                                       given to you, or the donor's adjusted basis.
area is the calendar year. The taxes for the
                                                     • Title insurance.                                    If you receive your home as a gift (after
previous year are assessed on January 2 and                                                            1976), add to your basis (the donor's adjusted
are due on May 31 and November 30. Under             • Any amount the seller owes that you             basis) the part of any federal gift tax paid that
state law, the taxes become a lien on May              agree to pay, such as back taxes or in-         is due to the net increase in the value of the
31. You agreed to pay all taxes due after the          terest, recording or mortgage fees, cost        home. Figure this part by multiplying the fed-
date of sale. The taxes due in 1999 for 1998           for improvements or repairs, and sales          eral gift tax paid on the gift of the home by a
were $520. The taxes due in 2000 for 1999              commissions.                                    fraction. The numerator (top part) of the
will be $565.                                                                                          fraction is the net increase in the value of the
    You cannot deduct any of the taxes paid            If the seller actually paid for any item that   home, and the denominator (bottom part) is
in 1999 because they relate to the 1998            you are liable for and that you can take a          the value of the home. The net increase in the
property tax year. You did not own the home        deduction for (such as your share of the real       value of the home is the fair market value of
until 1999. Instead, you add the $520 to the       estate taxes for the year of sale), you must        the home minus the donor's adjusted basis.
cost (basis) of your home.                         reduce your basis by that amount unless you             Publication 551, Basis of Assets, gives
    Because you owned the home in 1999 for         are charged for it in the settlement.               more information including examples of figur-
243 days (May 3 to December 31), you can               Items not added to basis and not                ing your basis when you received property
take a tax deduction on your 2000 return of        deductible. Here are some settlement and            as a gift.
$376 [(243 ÷ 365) × $565] paid in 2000 for         closing costs which you cannot deduct or add
1999. You add the remaining $189 ($565 −           to your basis.
$376) of taxes paid in 2000 to the cost (basis)
of your home.
                                                                                                       Inheritance
                                                    1) Fire insurance premiums.
                                                                                                       Your basis in a home you inherited is gener-
                                                    2) Charges for using utilities or other ser-       ally the fair market value of the home on the
Settlement or closing costs. If you bought             vices related to occupancy of the home          date of the decedent's death or on the alter-
your home, you probably paid settlement or             before closing.                                 nate valuation date if the estate qualified and
closing costs in addition to the contract price.                                                       used this date. If an estate tax return was
These costs are divided between you and the         3) Rent for occupying the home before              filed, your basis is the value of the home listed
seller according to the sales contract, local          closing.                                        on the estate tax return.
custom, or understanding of the parties. If                                                                If an estate tax return was not filed, your
                                                    4) Charges connected with getting or refi-
you built your home, you probably paid these                                                           basis is the appraised value of the home at
                                                       nancing a mortgage loan, such as:
costs when you bought the land or settled on                                                           the decedent's date of death for state inher-
your mortgage.                                         a)    FHA mortgage insurance premiums           itance or transmission taxes. Publication 551
    The only settlement or closing costs you                 and VA funding fees,                      and Publication 559, Survivors, Executors,
can deduct are home mortgage interest and                                                              and Administrators, have more information
certain real estate taxes. You deduct them in          b)    Loan assumption fees,                     on the basis of inherited property.
Page 8
                                                    for improvements or other additions to the               ness) to receive our electronic newslet-
Adjusted Basis                                      basis. In addition, you should keep track of             ters on hot tax issues and news.
While you own your home, various events             any decreases to the basis such as those
may take place that can change the original                                                                • Small Business Corner (located under
                                                    listed in Table 3.                                       Tax Info For Business) to get information
basis of your home. These events can in-
crease or decrease your original basis. The                                                                  on starting and operating a small busi-
                                                    How to keep records. How you keep rec-                   ness.
result is called adjusted basis. See Table 3        ords is up to you, but they must be clear and
for a list of some of the items that can adjust     accurate and must be available to the IRS.           You can also reach us with your computer
your basis.                                                                                              using File Transfer Protocol at ftp.irs.gov.
                                                    How long to keep records. You must keep
Improvements. An improvement materially             your records for as long as they are important
adds to the value of your home, considerably        for the federal tax law.
prolongs its useful life, or adapts it to new           Keep records that support an item of in-                 TaxFax Service. Using the phone
uses. You must add the cost of any improve-         come or a deduction appearing on a return                    attached to your fax machine, you can
ments to the basis of your home. You cannot         until the period of limitations for the return               receive forms and instructions by
deduct these costs.                                 runs out. ( A period of limitations is the limited   calling 703–368–9694. Follow the directions
    Improvements include putting a recreation       period of time after which no legal action can       from the prompts. When you order forms,
room in your unfinished basement, adding            be brought.) For assessment of tax you owe,          enter the catalog number for the form you
another bathroom or bedroom, putting up a           this is generally 3 years from the date you          need. The items you request will be faxed to
fence, putting in new plumbing or wiring, in-       filed the return. For filing a claim for credit or   you.
stalling a new roof, and paving your driveway.      refund, this is generally 3 years from the date
    Amount added to basis. The amount               you filed the original return, or 2 years from
you add to your basis for improvements is           the date you paid the tax, whichever is later.
your actual cost. This includes all costs for       Returns filed before the due date are treated                Phone. Many services are available
material and labor, except your own labor,          as filed on the due date.                                    by phone.
and all expenses related to the improvement.            You may need to keep records relating to
For example, if you had your lot surveyed to        the basis of property (discussed earlier)
put up a fence, the cost of the survey is a part    longer than the period of limitations. Keep            • Ordering forms, instructions, and publi-
of the cost of the fence.                           those records as long as they are important              cations. Call 1–800–829–3676 to order
    You must also add to your basis state and       in figuring the basis of the original or re-             current and prior year forms, instructions,
local assessments for improvements such as          placement property. Generally, this means for            and publications.
streets and sidewalks. These assessments            as long as you own the property and, after
are discussed earlier under Real Estate
                                                                                                           • Asking tax questions. Call the IRS with
                                                    you dispose of it, for the period of limitations         your tax questions at 1–800–829–1040.
Taxes.                                              that applies to you.
    Repairs versus improvements. A repair                                                                  • TTY/TDD equipment. If you have access
keeps your home in an ordinary, efficient op-                                                                to TTY/TDD equipment, call 1–800–829–
erating condition. It does not add to the value                                                              4059 to ask tax questions or to order
of your home or prolong its life. Repairs in-                                                                forms and publications.
clude repainting your home inside or outside,       How To Get More                                        • TeleTax topics. Call 1–800–829–4477 to
fixing your gutters or floors, fixing leaks or
plastering, and replacing broken window
                                                    Information                                              listen to pre-recorded messages covering
                                                                                                             various tax topics.
panes. You cannot deduct repair costs and           You can order free publications and forms,
generally cannot add them to the basis of           ask tax questions, and get more information          Evaluating the quality of our telephone
your home.                                          from the IRS in several ways. By selecting the       services. To ensure that IRS representatives
    However, repairs that are done as part of       method that is best for you, you will have           give accurate, courteous, and professional
an extensive remodeling or restoration of your      quick and easy access to tax help.                   answers, we evaluate the quality of our tele-
home are considered improvements. You                                                                    phone services in several ways.
add them to the basis of your home.                 Free tax services. To find out what services
    Records to keep. You can use Table 4            are available, get Publication 910, Guide to           • A second IRS representative sometimes
as a guide to help you keep track of im-            Free Tax Services. It contains a list of free tax        monitors live telephone calls. That person
provements to your home. Also see Keeping           publications and an index of tax topics. It also         only evaluates the IRS assistor and does
Records, later.                                     describes other free tax information services,           not keep a record of any taxpayer's name
                                                    including tax education and assistance pro-              or tax identification number.
Energy conservation subsidy. If a public            grams and a list of TeleTax topics.                    • We sometimes record telephone calls to
utility gives you (directly or indirectly) a sub-          Personal computer. With your per-                 evaluate IRS assistors objectively. We
sidy for the purchase or installation of an en-            sonal computer and modem, you can                 hold these recordings no longer than one
ergy conservation measure for your home,                   access the IRS on the Internet at                 week and use them only to measure the
do not include the value of that subsidy in         www.irs.gov. While visiting our web site, you            quality of assistance.
your income. You must reduce the basis of           can select:                                            • We value our customers' opinions.
your home by that value.                                                                                     Throughout this year, we will be survey-
     An energy conservation measure is an             • Frequently Asked Tax Questions (located              ing our customers for their opinions on
installation, or modification of an installation,       under Taxpayer Help & Ed) to find an-                our service.
that is primarily designed to reduce con-               swers to questions you may have.
sumption of electricity or natural gas or to
improve the management of energy demand.              • Forms & Pubs to download forms and
                                                        publications or search for forms and
                                                        publications by topic or keyword.                        Walk-in. You can walk in to many
                                                                                                                 post offices, libraries, and IRS offices
                                                      • Fill-in Forms (located under Forms &                     to pick up certain forms, instructions,
                                                        Pubs) to enter information while the form
Keeping Records                                         is displayed and then print the completed
                                                                                                         and publications. Also, some libraries and IRS
                                                                                                         offices have:
         Keeping full and accurate records is           form.
         vital to properly report your income         • Tax Info For You to view Internal Reve-            • An extensive collection of products avail-
 RECORDS and expenses, to support your de-              nue Bulletins published in the last few              able to print from a CD-ROM or photo-
ductions, and to know the basis or adjusted             years.                                               copy from reproducible proofs.
basis of your home. These records include                                                                  • The Internal Revenue Code, regulations,
your purchase contract and settlement papers
                                                      • Tax Regs in English to search regulations
                                                        and the Internal Revenue Code (under                 Internal Revenue Bulletins, and Cumula-
if you bought the property, or other objective                                                               tive Bulletins available for research pur-
                                                        United States Code (USC)).
evidence if you acquired it by gift, inheritance,                                                            poses.
or similar means. You should keep any re-             • Digital Dispatch and IRS Local News Net
ceipts, canceled checks, and similar evidence           (both located under Tax Info For Busi-
                                                                                                                                                 Page 9
        Mail. You can send your order for       • Eastern part of U.S. and foreign ad-          • Popular tax forms which may be filled in
        forms, instructions, and publications     dresses:                                        electronically, printed out for submission,
        to the Distribution Center nearest to     Eastern Area Distribution Center                and saved for recordkeeping.
you and receive a response within 10 work-        P.O. Box 85074                                • Internal Revenue Bulletins.
days after your request is received. Find the     Richmond, VA 23261–5074
address that applies to your part of the                                                          The CD-ROM can be purchased from
country.                                                                                      National Technical Information Service (NTIS)
                                                                                              by calling 1–877–233–6767 or on the Internet
                                                                                              at www.irs.gov/cdorders. The first release
  • Western part of U.S.:                            CD-ROM. You can order IRS Publi-
                                                                                              is available in mid-December and the final
    Western Area Distribution Center                 cation 1796, Federal Tax Products on
                                                                                              release is available in late January.
    Rancho Cordova, CA 95743–0001                    CD-ROM, and obtain:
                                                                                                  IRS Publication 3207, Small Business
  • Central part of U.S.:                                                                     Resource Guide, is an interactive CD-ROM
                                                • Current tax forms, instructions, and pub-   that contains information important to small
    Central Area Distribution Center              lications.
    P.O. Box 8903                                                                             businesses. It is available in mid-February.
    Bloomington, IL 61702–8903                  • Prior-year tax forms, instructions, and     You can get one free copy by calling
                                                  publications.                               1–800–829–3676.




Page 10
Table 4. Record of Home Improvements
 Keep this for your records. Also keep receipts or other proof of improvements.
 Caution: Remove from this record any improvements that are no longer part of your main home. For example, if you put
 wall-to-wall carpeting in your home and later replace it with new wall-to-wall carpeting, remove the cost of the first carpeting.


          (a)                      (b)                  (c)                          (a)                       (b)                     (c)
 Type of Improvement              Date                Amount                Type of Improvement               Date                   Amount
                                                                            Heating & Air
 Additions:                                                                 Conditioning:
 Bedroom                                                                    Heating system
 Bathroom                                                                   Central air conditioning
 Deck                                                                       Furnace
 Garage                                                                     Duct work
 Porch                                                                      Central humidifier
 Patio                                                                      Filtration system
 Storage shed                                                               Other
 Fireplace
 Other                                                                      Electrical:
                                                                            Lighting fixtures
 Lawn & Grounds:                                                            Wiring upgrades
 Landscaping                                                                Other
 Driveway
 Walkway                                                                    Plumbing:
 Fences                                                                     Water heater
 Retaining wall                                                             Soft water system
 Sprinkler system                                                           Filtration system
 Swimming pool                                                              Other
 Exterior lighting
 Other                                                                      Insulation:
                                                                            Attic
 Communications:                                                            Walls
 Satellite dish                                                             Floors
 Intercom                                                                   Pipes and duct work
 Security system                                                            Other
 Other
                                                                            Interior
 Miscellaneous:                                                             Improvements:

 Storm windows and                                                          Built-in appliances
 doors                                                                      Kitchen modernization
 Roof                                                                       Bathroom
 Central vacuum                                                             modernization

 Other                                                                      Flooring
                                                                            Wall-to-wall carpeting
                                                                            Other




                                                                                                                                          Page 11
Index

                                                           8396 ....................................... 6                                                                  Paid at settlement or
A                                                       Free tax services ......................... 9            L                                                            closing ........................... 2,       8
Adjusted basis ............................. 9                                                                   Late payment charge .................. 3                  Refund or rebate ....................           2
Assessments:                                                                                                     Local benefits, assessments for .. 3                   Recordkeeping ............................         9
   For local benefits .................... 3                                                                                                                            Refund of:
   Homeowners association ....... 3                     G                                                                                                                  Mortgage interest ............... 3,            6
Assistance (See More information)                       Gift of home ................................. 8         M                                                         Real estate taxes ...................           2
                                                        Ground rent ................................. 3          MCC (Mortgage credit certificate)                  6   Repairs ........................................   9
                                                                                                                 Minister's or military housing allow-
B                                                                                                                   ance ........................................   2
Basis ............................................ 7    H                                                        More information .........................
                                                                                                                 Mortgage credit certificate (MCC)
                                                                                                                                                                    9
                                                                                                                                                                    6
                                                                                                                                                                        S
                                                        Help (See More information)                                                                                     Settlement or closing costs:
                                                                                                                 Mortgage insurance premiums ....                   8      Basis of home ........................          8
                                                        Home:
                                                                                                                 Mortgage interest:
C                                                          Inherited .................................       8
                                                                                                                    Credit ......................................   6
                                                                                                                                                                           Mortgage interest ...................
                                                                                                                                                                           Real estate taxes ............... 2,
                                                                                                                                                                                                                           4
                                                                                                                                                                                                                           8
Certificate, mortgage credit .........             6       Mortgage interest ...................             3
                                                                                                                    Deduction ...............................       3   Stamp taxes ................................       3
Construction ................................      7       Purchase of ............................          7
                                                                                                                    Late payment charge .............               3   Statement, mortgage interest ......                6
Cooperatives ........................... 3,        4       Received as gift .....................            8
                                                                                                                    Paid at settlement ..................           4
Cost basis ....................................    7    Homeowners association, assess-
                                                                                                                    Refund ................................ 3,      6
Credit, mortgage interest .............            6       ments ......................................      3
                                                                                                                    Statement ...............................       6
                                                        House payment ...........................            2                                                          T
                                                                                                                 Mortgage prepayment penalty ....                   3
                                                        Housing allowance, minister or mil-                                                                             Tax help (See More information)
                                                           itary .........................................   2
D                                                                                                                                                                       Taxes:
                                                                                                                                                                           Real estate ............................. 2
Deductions:                                                                                                      N                                                      Transfer taxes ............................. 3
  Home mortgage interest ........ 3                                                                              Nondeductible payments ......... 2, 8
  Real estate taxes ................... 2               I                                                                                                               TTY/TDD information .................. 9
                                                        Improvements ..............................          9
                                                        Inheritance ...................................      8
                                                                                                                 P                                                      V
E                                                       Insurance ................................. 2,
                                                        Interest:
                                                                                                             8
                                                                                                                 Points ........................................... 4
Escrow accounts           ......................... 2                                                            Prepaid interest ........................... 3         VA funding fees ........................... 8
                                                            Home mortgage .....................              3
                                                                                                                 Publications (See More information)
                                                            Prepaid ...................................      3

F                                                                                                                                                                       W
Fire insurance premiums ............. 8                                                                          R                                                      What you can and cannot deduct                     2
Form:                                                   K                                                        Real estate taxes:
   1098 ....................................... 6       Keeping records           .......................... 9     Deductible taxes ..................... 2




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