February 18th, 2010 12:32 PM by Lehel S.
Reporting from Washington - No one is perfect, especially when it comes to filing a federal income tax return. And with first-timers accounting for the majority of home buyers last year, the IRS is bracing for rookie mistakes.With that in mind, here, according to the Internal Revenue Service, are some common areas where first-time owners make errors:Points: "Points" is a term often used to describe all kinds of charges paid by a borrower to secure a mortgage. For example, "points" sometimes refers to the fee charged by the lender to make a loan. And, in some cases, the term refers to other fees and costs incurred for getting a mortgage.But only when points are interest paid in advance can they be tax deductible, and only when your loan is used to buy or improve your personal -- or main -- residence.For points to be deductible in the year they are paid, you must meet all of these other criteria as well:* The payment of points must be an established business practice for your area. In other words, most other people in your neck of the woods must pay them.* The amount paid cannot exceed that generally charged in your area.* You must use the cash method of accounting for expenses. That is, you must report income in the year you receive it and deduct your expenses in the tax year in which you paid the points.* The amount must have been computed as a percentage of your loan principal.* The amount must clearly be delineated as points charged for a mortgage on your HUD-1 settlement statement.* You must have put at least as much cash into the purchase of your home as the points paid.* The points are not paid in place of amounts normally stated separately on settlement statements, such as appraisal fees, survey fees and attorney's fees. If you do not satisfy each of these requirements, the IRS says, the points paid as advance interest must be spread over the life of the loan. If you meet all the rules but paid more than is customary, your deduction is limited to the amount generally charged, and the remainder must be spread over the loan's term.Refinancing: The points you pay to refinance a mortgage are not deductible in full in the year you paid them. Rather, you must spread the amount over the life of the new loan.But if you use part of the proceeds from refinancing to improve your principal residence and pay the points out of your own funds rather than from the proceeds of the new mortgage, you can write off the percentage of the points related to the improvement in the year the points are paid.Property taxes: If, at closing, you paid the property taxes owed by the seller up to the date of the sale, you cannot deduct that amount as taxes paid. Rather, it must be treated as part of your cost, or basis, in the property. But if you reimburse the seller for taxes paid in advance for you, you can deduct the amount paid for the period beginning with the date of the sale.Capital improvements: Taxpayers must keep records of capital improvements -- anything that increases the value of the property, lengthens its life or adapts it to a different use. For example, adding a bathroom, putting up a fence or installing new plumbing are improvements that add to your cost basis in the house, which is your original cost plus any amounts you spent to improve it. The combined amount is known as the adjusted basis.You can exclude as much as $250,000 of your gain ($500,000 for taxpayers filing jointly) on the sale of your personal residence, and you can do so as often as every two years as long as the property is your main home.For a more in-depth discussion of these and other tax issues, consult IRS Publication 530, Tax Information for First-Time Home Owners. You can find it online at www.irs.gov.