Question: We bought our first home in 1993. Please explain what purchase costs are tax deductible. Our closing costs included loan fee points, documentation fee, underwriting fee, inspection fee, title fee, attorney fee, insurance premium, pro-rated property tax, appraisal fee, credit report fee, tax service fee, notary fee, mortgage interest, transfer fee, and recording fee. _ Karin J.
Answer: It looks like your mortgage lender hit you with a bunch of "garbage fees," such as the documentation fee (for typing the loan papers), underwriting fee (for approving the loan) and inspection fee. Many lenders don't charge for these services which should be included in the loan fee points (one point equals 1 percent of the amount borrowed).
Only the loan fee points paid on your home acquisition mortgage, pro-rated property tax and mortgage interest qualify as personal, itemized deductions on your income tax returns. All the other closing costs you listed, except the insurance premium, should be added to your home's purchase price to arrive at its adjusted cost basis.
Save your closing papers forever because they are your only evidence you paid these charges. The insurance premium is neither tax deductible nor should it be added to your home's purchase cost. For further details, please consult your tax adviser.
Question: I am moving to my elderly mother's home to take care of her. But if I sell my house, located about 100 miles away, I will have a huge capital gains tax to pay. A friend told me you explained some way I can make a tax-deferred trade of my house for an apartment building near my mother's house. Please explain again. _ Claudia W.
Answer: Since you won't be buying a replacement principal residence, you won't be eligible for the famous "rollover residence replacement rule" of Internal Revenue Code 1034. It allows tax deferral when selling a principal residence and buying a replacement of equal or greater cost within 24 months.
Instead, you can make a tax-deferred exchange authorized by Internal Revenue Code 1031. However, both properties must be "like kind." That means they must be held for investment or use in a trade or business. To make your former residence qualify, rent it to tenants. The law does not specify any minimum rental time but most CPAs recommend at least six to 12 months before the exchange.
The easiest way to trade is to make a Starker delayed tax deferred exchange, authorized by IRC 1031(a)(3). First, sell your rental house (perhaps to its tenants). Second, have the sales proceeds held by a third-party intermediary, such as a bank trust department, beyond your constructive receipt. Third, within 45 days after the sale, designate the property to be acquired. Fourth, complete the acquisition within 180 days after the rental house sale.
To qualify for tax deferral, the trade must be equal or up in both price and equity. Also, you cannot take out any taxable "boot," such as cash or net mortgage relief, from the exchange. Please consult your tax adviser for further details.
Robert J. Bruss is a nationally syndicated columnist on real estate. Write to him in care of the Tribune Media Syndicate, c/o the Times, 64 E Concord St., Orlando, FL 32801. Questions of general interest will be answered in the column. Because of the volume of mail, personal answers to questions are impossible.