And points paid on a loan secured by a
second home or vacation residence, regardless of how
the cash is used, must be amortized over the life of
The other major deduction in connection with your home
is property taxes.
A big part of most monthly loan payments
is taxes, which go into an escrow account for payment
once a year. This amount should be included on the annual
statement you get from your lender, along with your
loan interest information. These taxes will be an annual
deduction as long as you own your home.
But if this is your first tax year in
your house, dig out the settlement sheet you got at
closing to find additional tax payment data. When the
property was transferred from the seller to you, the
year's tax payments were divided so that each of you
paid the taxes for that portion of the tax year during
which you owned the home. Your share of these taxes
is fully deductible.
A word of caution: If your settlement
statement shows any money you paid into an escrow account
for future taxes, this amount is not deductible. You
can only deduct the taxes in the year your lender actually
pays them to the property tax collector.
For example, you bought your house on
July 1. Your property taxes are due each Jan. 1. When
you closed, the seller had already paid the year's taxes
of $1,000 in full so you reimburse the seller half of
his annual tax payment to cover your ownership of the
property for the last six months of the year. Your $500
reimbursement to the seller is shown on your settlement
The closing document also shows you pre-paid
another $500 to the lender as escrow for the coming
year's taxes due next Jan. 1. The $500 you reimbursed
the seller at closing is deductible on this year's tax
return, but the $500 held in escrow is not deductible
until it is paid the next year.
When you decide to move up to a bigger home, you'll
be able to avoid some taxes on the profit you make.
Years ago, to avoid paying tax on the
sale of a residence a homeowner
had to use the sale proceeds
to buy another house. In 1997,
the law was changed so that
up to $250,000
in sales gain ($500,000 for
married joint filers) is tax-free
as long as the homeowner owned
the property for two years and
lived in it for two of the five
years before the sale.
If you sell before meeting the ownership
and residency requirements, you owe tax on any profit.
The IRS provides some tax relief if the sale is because
of a change in the owner's health, employment or unforeseen
circumstances. In these cases, the tax-free gain amount