Home owner tax deductions and credits for 2010

With the end of January here, everyone will have received all of the documents necessary to prepare their 2010 tax returns, so it is time to get cracking! Today’s guest post is from Colin Cary, a CPA with Smith Bunday Berman Britton, P.S., who talks about the primary tax deductions and credits for homeowners in 2010. Thanks for the informative post Colin!

There are several special tax deductions and credits available to purchasers of homes in 2010, along with other deductions that remain available for homeowners.

First-Time Homebuyer Credit

A credit of up to $8,000 is available for homes purchased before May 1, 2010. The credit is also available to purchases of homes completed by October 1, 2010 if the purchaser and seller enter into a written binding contract for the home before May 1, 2010, to close before July 2, 2010.

Calling this credit the “First-Time Homebuyer Credit” is a little misleading. The credit is available to purchasers who have had no ownership interest in a principal residence at any time during the three-year period ending on the date of the purchase. In addition, purchasers who have had an ownership interest in a principal residence for a five-consecutive-year period during the eight-year period ending on the date of the purchase can qualify for a reduced credit of up to $6,500. In either case, the purchased home must be used as a principal residence.

The credit is claimed on Form 5405, Fist-Time Homebuyer Credit and Repayment of the Credit. In order to claim this credit, one of the following documents must be attached to the 2010 tax return:

  • A copy of the settlement statement showing all parties’ names and signatures, property address, sales price, and date of purchase. Typically, a copy of the Form HUD-1, Settlement Statement, is used.
  • If a mobile home is purchased and a settlement statement is not available, a copy of the executed retail sales contract showing all parties’ names and signatures, property address, purchase price and date of purchase may be used.
  • If a newly constructed home is purchased and a settlement statement is similarly not available, a copy of the certificate of occupancy showing the owner’s name, property address and date of the certificate may be used.

Qualified Residence Interest Deduction

Interest paid on acquisition or home equity indebtedness is deductible as an itemized deduction. Acquisition indebtedness includes all debt incurred to acquire, construct, or substantially improve a qualified residence so long as the debt is secured by the residence. Home equity indebtedness includes any other debt secured by the residence, so long as it does not exceed the fair value of the residence reduced by any acquisition indebtedness. The interest on up to $1 million of acquisition indebtedness plus up to $100,000 of home equity indebtedness may be deducted.

Mortgage Insurance Premiums

Premiums on mortgage insurance provided by the Veterans Administration, the Federal Housing Administration, the Rural Housing Administration, and private mortgage insurance paid for 2010 are deductible as qualified residence interest. If premiums are prepaid for the term of the loan, the portion allocable to 2010 may be deducted.

Points

Points paid on a loan for the purchase or improvement of, and secured by, a principal residence are also deductible as mortgage interest in the year paid. “Points” include amounts designated as “loan origination fees”, “loan discount”, “discount points”, or “points” which are calculated as a percentage of the loan amount so long as these amounts are not paid from loan proceeds.

Real Estate Taxes

Real estate taxes paid during 2010 are deductible as an itemized deduction. In addition to amounts paid directly by the home owner or from a mortgage escrow account, amounts charged to the buyer through the apportionment of real property tax on sale (listed on the HUD-1 form) are also deductible.

About Colin Cary

Colin has over 22 years of experience in public accounting, primarily in the area of taxation. Colin graduated from Seattle Pacific University in 1988 with a B.A. in Accounting, Finance and Computer Science. He joined Smith Bunday Berman Britton in September 2000 and has extensive experience with closely-held corporations and their shareholders, including transactional planning between corporations, shareholders and related corporations, corporate and individual tax return preparation (including complex consolidated corporate returns), representation of corporations and related shareholders before federal and state tax agencies, and planning related to corporate acquisitions, reorganizations, liquidations, debt restructuring (including issues related to net operating loss limitations and utilization), and employee compensation arrangements. Colin is a member of the American Institute of Certified Public Accountants and the Washington Society of Certified Public Accountants.