Archive for August, 2010

7 Homeowner Tax Advantages

Friday, August 13th, 2010

 

By: G. M. Filisko

When you’re evaluating how much home you can afford, make sure you factor in the tax advantages of homeownership.  You can claim some tax deductions if you work from home, but be sure you’re entitled to them before taking them.  Owning your home not only allows you to build wealth through appreciation, but it can also reduce the amount of income tax you pay every year.  Here are seven tax benefits for homeowners.

1. Homebuyer tax credits

If you purchase your first home before April 30, 2010, you’re entitled to a tax credit of up to $8,000. If you currently own a home, but sell it to purchase another home before April 30, 2010, you’re eligible for a federal tax credit of up to $6,500.

2. Deductions for loan fees

Typically, you can deduct the “prepaid interest” you paid when you got your mortgage loan. That includes points, loan origination fees, and loan discount fees listed on your settlement statement, even if the seller paid those fees for you. Each time you refinance your home, you can deduct prepaid interest fees.

However, you must meet certain requirements to take the prepaid interest deductions when you purchase or refinance your home. Check with your accountant to be sure you’re following the rules.

3. Property tax deductions

In the year you purchase your home, you’re entitled to deduct the real estate taxes you paid at the closing table. You can continue to deduct the property taxes you pay each year.

4. The mortgage interest deduction

Every year, you can deduct the amount of interest and late charges you pay on your mortgage and home equity loans, though there are limitations. If you’re required to purchase private mortgage insurance (PMI) because you made a downpayment of less than 20% on your home, you can also deduct those premiums as mortgage interest expenses.

5. Home office expenses

If you have a home office you use only for business, you may be eligible to deduct the prorated costs of your mortgage, insurance, and other expenses related to that space. The government scrutinizes home-office deductions closely. Be sure you’re entitled to the deductions before claiming them.

6. The costs of selling your home

In the year you sell your home, you can deduct the costs of selling it, including real estate commissions, title insurance, legal fees, advertising, administrative costs, and inspection fees. You can also deduct decorating or repair costs you incur in the 90 days before you sell your home.

7. The gain on your home

If you lived in your home for at least two of the previous five years before you sell it, the government lets you to take up to $250,000 of profit on the sale of your home tax free. That amount is doubled for married couples. This deduction isn’t available on rental or second homes.

The government also allows you to subtract from your home sale profit any amounts you spend on improvements, such as window replacement, siding, or a kitchen remodel. Those deductions are in addition to the tax credits you can receive in 2010 for making energy-saving upgrades. Money invested for routine maintenance and repairs doesn’t count.

This article includes general information about tax laws and consequences, but is not intended to be relied upon as tax or legal advice applicable to particular transactions or circumstances. Consult a tax professional for such advice; tax laws vary by jurisdiction.

Homeowners Insurance: Are You Over- or Underinsured?

Friday, August 6th, 2010

By: G. M. Filisko

Paying for more homeowners insurance than you need is a waste of money, but it can prove even more costly to get caught without enough.  To get the full benefit of replacement coverage, you need to purchase enough insurance to cover the total cost to rebuild your home.

Trying to get just the right amount of homeowners insurance for your house and possessions may leave you feeling a bit like Goldilocks searching for a chair, a bed, and porridge that are just right. If you underinsure your home and suffer a devastating loss—flood, fire, theft—then you risk not being able to return to the lifestyle you’ve worked hard to achieve. Yet if you overinsure, you’re throwing money away every year on unnecessarily high premiums.

What you need is coverage that’s just right. Here’s how to get it, and it shouldn’t take more than 4 or 5 hours of your time spent reviewing your homeowners insurance policy, talking to your agent, and doing a little research.

Look before you leap into a policy

All homeowners insurance isn’t created equal. That’s why it pays to review your coverage every year to ensure your policy meets your evolving needs. Begin by understanding the types of coverage available.

Actual cash value coverage reimburses you for the value of your home based on its current condition, explains Marjorie Young, senior vice president at E.G. Bowman Co., a New York City insurance brokerage. If your home was built 10 years ago, you’d receive only the depreciated value of decade-old windows, cabinets, appliances, and so on.

Most insurers recommend the more comprehensive replacement cost coverage. With it, says Young, you’ll be reimbursed for the amount it will cost to rebuild your home like new with the same kind and quality of materials. Depreciation doesn’t factor into the settlement equation.

To get the full benefit of replacement coverage, you need to purchase enough insurance to cover the total cost to rebuild your home, excluding the value of the land. Many people make the mistake of insuring at the market value, says June Walbert of USAA Financial Planning Services in San Antonio. But the amount you could sell your home for today isn’t necessarily the same as how much it would cost to rebuild.

Construction costs play big role

Look to current construction costs in your local area for guidance. If you’ve purchased a newly constructed home in the past year, you already have the answer. The same is true if you’ve refinanced within the past year. You almost certainly paid for an appraisal during that process that likely includes three valuations: replacement cost, market value, and actual cash value.

If you’re determining replacement cost without those head-starts, Walbert recommends calling several local homebuilders and asking the average square-foot construction cost in your area. If the going rate is $175, and your home is 2,000 square feet, you’d purchase $350,000 in coverage. For just a few bucks you can also order a valuation report online at a website like AccuCoverage ($7.95) or Home Smart Reports ($6.95).

Remember that any time you spend at least 5% of your home’s value on a remodeling project—or $5,000, whichever is less—you should contact your insurer to increase your coverage. Young recently did that after she revamped her own kitchen. An additional $40,000 in homeowners coverage raised her annual premium by about $40.

Don’t neglect valuables, liability

Be sure you’re also insured at the right value for your home’s contents and for personal liability. Most insurance polices provide only actual cash value on contents, says Lisa Lobo, vice president of underwriting operations at The Hartford in Southington, Conn. To get replacement cost coverage, you’ll need to purchase an endorsement. If you have valuables not covered by your policy—silverware, jewelry, furs—purchase endorsements for those, too.

Many people pay no attention to the liability coverage limits in their policies, but Walbert says that’s a mistake. If you have a dinner party and a guest falls down your front steps, you don’t want to be underinsured. In recent years the average liability claim for bodily injury and property damage has been $15,854. Walbert recently increased a homeowner’s liability coverage by several hundred thousand dollars for just $6 more per year.

If you’re concerned about increasing your premiums by adding endorsement after endorsement, ask whether you can save money by splitting your deductible, paying a higher amount for certain claims and a lower amount for others. Bundled endorsements can save you a few bucks, but only if you require them all. Take a pass on unneeded riders. Why spend $8 to $12 a year for $500 worth of refrigerated property coverage when you eat takeout every night?

G.M. Filisko is an attorney and award-winning writer who has been involved in insurance litigation. A frequent contributor to many national publications including Bankrate.com, REALTOR(R) Magazine, and the American Bar Association Journal, she specializes in real estate, personal finance, and legal topics.