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Often-forgotten tax deductions

Published Oct. 1, 2005

Part 12 of a 12-part series of realty tax tips.

Time is getting short for filing your 1996 income tax returns, due on April 15, 1997, but before you do so take time to review this checklist of 10 often-forgotten real estate tax deductions:

Loan fee paid to obtain a home acquisition mortgage. If you bought a home in 1996, you probably obtained a new mortgage, which required payment of a loan fee. Often called "points" (each point equals 1 percent of the amount borrowed), a loan fee on a home acquisition mortgage up to $1-million is tax deductible as itemized personal interest on Schedule A of your tax returns.

Loan fee paid to obtain a home improvement loan. Similarly, if you paid a loan fee to obtain a home improvement loan, it is deductible as itemized interest.

Loan fee paid on other real estate loans must be amortized. If you paid a loan fee to refinance your home loan, or you obtained any other type of real estate loan, it is not fully deductible in the year paid. Instead, it must be amortized over the life of the loan.

For example, suppose you paid a $1,000 loan fee to refinance with a 30-year home loan. Each year for the next 30 years you get to deduct the $33.33 annual amortized loan fee.

Deduct any undeducted loan fee on a previous refinance. If you refinanced your home mortgage for a second time or sold your home and paid off a previously refinanced home mortgage, don't forget to deduct the remaining undeducted loan fee.

Deduct pro-rated real estate taxes paid in the year of realty purchase or sale. If you bought or sold real estate in 1996, the property taxes were probably pro-rated between buyer and seller at the time of sale closing. Whether you or the other party actually paid the tax collector, you can deduct your share of the pro-rated property taxes shown on the closing settlement statement.

Deduct pro-rated mortgage interest for the year of realty purchase or sale. If you bought or sold real estate in 1996, and either you or the other party took over an existing mortgage, don't forget the pro-rated mortgage interest for the month of the property sale. Your closing settlement statement shows your share of the pro-rated interest.

Deduct a mortgage prepayment penalty. If you sold property in 1996, paying off its mortgage early, and had to pay a mortgage prepayment penalty, that penalty fee is tax deductible as interest.

Prepaid real estate taxes. Many taxpayers prepaid their 1997 property taxes in late 1996. These prepaid real estate taxes qualify as a tax deduction on your 1996 income tax returns.

Property taxes paid from your escrow impound account. If you pay one-twelfth of your real estate property tax each month along with your mortgage payment into an escrow impound account, those payments into the account are not deductible.

However, when your mortgage servicer remits the property tax payment to the local tax collector, the amount remitted qualifies as an itemized tax deduction for you. The year-end 1098 statement from your lender, itemizing mortgage interest, usually shows the property tax you can deduct.

Ground rent payments. Millions of homeowners lease the land on which their homes are located. Internal Revenue Code 163(c) says these land lease payments are tax deductible as itemized interest if the ground lease is for at least 15 years, including renewal periods; the lease is freely assignable to a buyer of your home, you have a present or future option to buy the land and the land owner's interest is primarily a security interest, similar to a mortgage. If you do not have an option to buy the land, such as renting a mobile home lot, your land lease payments are not tax deductible.

At the time of property purchase, the buyer often pays charges such as transfer, recording, attorney and title fees. While not tax deductible, they should be added to the property's purchase price when calculating its adjusted cost basis.

Similarly, if you paid a special property tax assessment that benefits your property, such as for sewers, streets or sidewalks, that special assessment is not tax deductible. Instead, it should be added to your property's adjusted cost basis. The reason is that such civic improvements enhance your property's value. They will reduce your taxable profit when you sell your property.

Ask your tax adviser for further details on the so-called forgotten tax deductions that can result in income tax savings.

Robert J. Bruss is a nationally syndicated columnist on real estate.

Reprints of this entire series "1997 Realty Tax Tips-12 Chapters of Tax Saving Ideas" are available for $4 sent to Robert J. Bruss, 251 Park Road, Burlingame, CA 94010.