Here's an overview of these important deductions.
If you itemize your personal deductions, interest that you pay on your mortgage is tax deductible, within limits.
These numbers are for both single taxpayers and married taxpayers filing jointly. The maximums are halved for married taxpayers filing separately. Learn more from IRS Publication 936, Home Mortgage Interest Deduction.
Private mortgage insurance (PMI) is often required by the lender when a home purchaser borrows more than 80% of the home's purchase price. PMI usually costs $30 to $70 per month for every $100,000 borrowed.
The deduction for these premiums expired at the end of 2017. However, Congress later revived it for 2018 through 2021. The deduction is currently not avaiable for 2022 and later years. However, it is always possible that Congress will revive it.
Your mortgage lender will charge you a variety of fees, one of which is called "points," or sometimes "discount points." These are amounts you choose to pay in exchange for a better interest rate. One point is equal to 1% of the loan principal.
One to three points are common on home loans, which can easily add up to thousands of dollars. You can fully deduct points associated with a home purchase mortgage.
Refinanced mortgage points are also deductible, but only over the life of the loan, not all at once. Homeowners who refinance can immediately write off the balance of the old points and begin to amortize the new.
Before 2018, you could deduct the interest on up to $100,000 in home equity loans. You could use the money for any purpose and still get the deduction—for example, homeowners could deduct the interest on home equity loans used to pay off their credit cards or help pay for their children’s college education. The TCJA eliminated this special $100,000 home equity loan deduction for 2018 through 2025.
However, the interest you pay on a home equity loan that's used to purchase, build, or improve your main or second home remains deductible. The loan must be secured by your main home or second home.
So, for example, you can deduct the interest on a home equity loan you use to add a room to your home or make other improvements. Such a home equity loan counts towards the $750,000 or $1 million mortgage interest deduction loan limit (see #1 above) and the interest is deductible only on loans up to the applicable limit.
One of the most significant changes brought about by the TCJA was to impose a $10,000 annual cap on the itemized deduction for property tax and other state and local taxes, which had never been limited before. From 2018 through 2025, homeowners may deduct a maximum of $10,000 of their total payments for:
This $10,000 limit applies to both single and married taxpayers and is not indexed for inflation.
If your home mortgage lender required you to set up an impound or escrow account, you can't deduct escrow money held for property taxes until the money is actually used to pay them. Also, a city or state property tax refund reduces your federal deduction by a like amount.
If you use a portion of your home exclusively for business purposes, you might be able to deduct home costs related to that portion, such as a percentage of your insurance and repair costs, and depreciation. For details, see the book Home Business Tax Deductions: Keep What You Earn, by Stephen Fishman (Nolo).
If you decide to sell your home, you'll be able to reduce your taxable capital gain by the amount of your selling costs. (You might not have to worry about your gain at all if it's low enough to fall within the exclusion described below, but if your profits from the sale might be higher than the exclusion, take a closer look at this section.)
Real estate broker's commissions, title insurance premiums, legal fees, advertising costs, administrative costs, escrow fees, and inspection fees are all considered selling costs.
All selling costs are deducted from your gain. Your gain is your home's selling price, minus deductible closing costs, selling costs, and your tax basis in the property. (Your basis is the original purchase price, plus the cost of capital improvements, minus any depreciation.)
Married taxpayers who file jointly get to keep, tax free, up to $500,000 in profit on the sale of a home used as a principal residence for two of the prior five years. Single folks (including home co-owners if they separately qualify) and married taxpayers who file separately get to keep up to $250,000 each, tax free. (For more information, see Avoiding Capital Gains When Selling Your Home: Read the Fine Print.)
A home-buying program called "mortgage credit certificate" (MCC) allows low-income, first-time homebuyers to benefit from a mortgage interest tax credit of up to 20% of the mortgage interest payments made on a home (the amount of the credit varies by jurisdiction). The maximum credit is $2,000 per year if the certificate credit rate is over 20%. (See IRS Publication 530, Tax Information for Homeowners.)
You must first apply to your state or local government for an actual certificate. This credit is available each year you keep the loan and live in the house purchased with the certificate. The credit is subtracted, dollar for dollar, from the income tax owed. For details and links to state housing agencies, visit the National Council of State Housing Agencies website.
For more information on real estate tax laws, visit www.irs.gov. You'll find basic information for first-time homeowners (IRS Publication 530) and publications about selling your house (IRS Publication 523), business use of your home (Publication 587), and home mortgage interest deductions (Publication 936).
]]>How can you reduce a property tax burden that seems unfairly high? There are two main ways, including:
You might know that the Pennsylvania authorities compute your property tax by multiplying your home’s taxable value by the tax rate.
Pennsylvania has 67 different counties. Both property tax rates and home values are determined by local state government officials. Property tax rate information for your county is available on the taxrates.org website. Each of those has its own process for how it determines the value of your home.
Normally, each county has assessors on staff who place values on local homes. To find the contact information for your county assessors office, go to Pennsylvania's Department of Community and Economic Development website.
Here's an example of how Pennsylvania's assessment and tax system works: Rocky and Adrianna own a home in Pennsylvania, on which the assessor has placed a taxable value of $200,000. If the tax rate is 1%, Rocky and Adrianna will owe $2,000 in property tax. So, they appeal the $200,000 taxable value. The appeals board reduces that value to $150,000. Now, Rocky and Adrianna owe only $1,500 in property tax on their Pennsylvania home.
If you believe that the tax assessor has misjudged the value of your home, or if the taxable value is higher than that of similar homes in your neighborhood (of similar size, condition, and so on), you might wish to pursue an appeal. For more information, read Should You Challenge Your Property Tax Assessment in Pennsylvania?
Beyond attempting to reduce the taxable value of your home, Pennsylvania allows for reduced property taxes if the homeowner meets certain requirements. Many of these programs were clarified and expanded through the Homeowner Tax Relief Act, Act 72 of 2004. Two of the most commonly used programs are:
Homestead and farmstead exemption. A portion of your Pennsylvania home’s value may be excluded from property tax. The amount will depend on the tax jurisdiction or school district in which the home is located. Learn more about the homestead and farmstead exemption and how to apply (which you might need to do every three years, per 53 Pa. C.S. § 8584(a)) from the Pennsylvania Department of Community and Economic Development, and check for details with your county's tax office.
Disabled veterans. A veteran who is blind, paraplegic, or a double amputee, or has a 100% military-connected disability may be exempt from Pennsylvania property tax. It depends on the veteran’s economic need. The same exemption is available to the unmarried surviving spouse of such a veteran. Learn more about the veterans' exemption from Pennsylvania's Department of Military and Veterans' Affairs.
Although Pennsylvania laws set statewide property tax rules, your local government handles the administration and levying of property tax. You'll want to contact your local tax assessor for complete details on property tax exemptions. Be sure to ask about any forms you need to complete and the deadline for filing.
In addition to property tax, which is based on the assessed value of your home, your tax bill might include special assessments. Typically these are made to pay for improvements, such as street paving or repaving, in your neighborhood.
If you are low income and age 65 or older, a widow or widower age 50 or older, or are age 18 or older and disabled, you might qualify for a tax rebate of up to $1,000. Although the income limit was $35,000 for several years, it was raised to $45,000 in 2023. See the Pennsylvania Department of Revenue's web page describing the details and application process.
A few Pennsylvania school districts, such as Avon Grove and Malvern, have created Senior Citizen Volunteer Tax Relief Programs. Residents who are age 60 or older can receive a modest rebate on the school-funding portion of their property taxes based on hours worked in local schools. After passing a screening you might, for example, help out in the library, tutor children who need personal attention, assist the building and grounds crew, or volunteer in the administrative offices.
]]>To keep financially strapped homeowners from taking a hit at tax time, Congress passed the Mortgage Forgiveness Debt Relief Act in 2007, and I.R.C. § 108(a)(1)(E) was added to the Internal Revenue Code. This law created the "Qualified Principal Residence Indebtedness" (QPRI) exclusion.
Under this exclusion, if part or all of your mortgage debt on your principal residence is forgiven, you might be able to exclude the forgiven debt from your taxable income.
Ordinarily, when $600 or more of debt is forgiven or canceled by a creditor, the amount forgiven is considered income for federal tax purposes. When it's clear you won't be repaying the money you received, tax law recognizes the money as income.
For example, say you do a short sale, selling your home for $550,000. But you owe the lender $600,000. As part of the short sale agreement, your lender agrees not to pursue you for the deficiency and issues you an IRS Form 1099-C, Cancellation of Debt, form.
The waived amount might be considered income for tax purposes.
The amount of the forgiven debt is considered income only once it's canceled. So, you must report the forgiven amount on your federal (and perhaps state) tax return and pay taxes on it, just like any other kind of income, unless you qualify for an exception or exclusion.
If your lender has forgiven some or all of your mortgage debt, can you get out of paying income tax on that debt using the QPRI exclusion? Here are the key factors that determine if you qualify for the QPRI exclusion.
The QPRI exclusion expires on January 1, 2026. But the exclusion can also apply to debts forgiven as the result of a written agreement entered into before January 1, 2026, even if the actual discharge happens later. (I.R.C. § 108(a)(1)(E)).
If you don't qualify for tax relief under the QPRI exclusion, you might qualify for another exception or exclusion.
Cancellation of debt income generally isn't taxable if the debt has been discharged in bankruptcy (before it's forgiven), you're insolvent when the debt is forgiven, the debt is a certain kind of farm debt, or if the property was subject to a nonrecourse debt. (A "recourse debt" is a loan the borrower is personally liable to repay.)
The IRS has more information about forgiven mortgage debt and instructions for taxpayers at www.irs.gov. Review IRS Publication 4681 on Canceled Debts, Foreclosures, Repossessions, and Abandonments, as well as Topic No. 431 Canceled Debt – Is It Taxable or Not?
Learn more about tax consequences when a creditor writes off a debt.
Get information about strategies for negotiating with creditors to settle debts.
Find out which is worse for your credit scores—a foreclosure, short sale, or loan modification.
Tax laws are complicated. If you received a 1099-C form indicating your lender forgave all or part of your mortgage debt, or if you’re considering completing a loan modification, short sale, or deed in lieu of foreclosure that has tax implications, talk to a tax attorney or tax accountant to get advice specific to your circumstances.
If you have questions about how foreclosure works, need help applying for a loan modification, or want to learn the pros and cons of completing a short sale or deed in lieu of foreclosure, talk to a foreclosure lawyer.
A HUD-approved housing counselor can also provide you with loss mitigation information.
]]>However, the Tax Cuts and Jobs Act (TCJA), a massive tax reform law that took effect in 2018, made a huge change in the law. Starting in 2018 and continuing through 2025, theft and casualty losses to personal property are deductible only if they occur due to a federally declared disaster. That means major disasters so serious and widespread that state and local governments need federal help. It can include hurricanes, tornados, major storms, tidal waves, earthquakes, snowstorms, droughts, or floods.
You can find a list of federally declared disasters at www.disasterassistance.gov.
All other theft and casualty losses are no longer deductible during these years.
Under the TCJA rules, if your property is stolen in a simple home burglary, you may not take a theft loss deduction. But if your home is in a federally declared disaster area and your personal property is stolen or damaged by looters, you could take a theft loss deduction for your uninsured losses. To take the deduction, you would need to be able to prove your property was stolen. File a police report or get other proof that looters were present.
Again, losses due to a theft outside the context of a natural disaster are not deductible theft losses from 2018 through 2025.
What about other theft losses arising from disasters? For example, what if your home is damaged or destroyed in a federal disaster and you are criminally defrauded by a contractor when you attempt to rebuild? Under prior law, criminal contractor fraud loss claims were deductible as theft losses. Under the new law, however, it's not entirely clear whether you could claim a theft loss deduction for this type of contractor fraud. It all depends on whether the IRS would consider such a theft loss as attributable to a federally declared disaster. Ordinarily, contractors are hired some time after a disaster has occurred. Would this mean any fraud they commit is not attributable to such a disaster? It's unclear. But it's probably worth attempting to claim the deduction anyway.
It's common for a property owner to have a theft or casualty gain instead of a loss. This occurs when the insurance proceeds received exceed the adjusted basis in the property. A theft or casualty gain is taxable income. However, you may claim theft or casualty losses not due to federally declared disasters to offset such theft or casualty gains during 2018 through 2025.
If a theft loss of personal property is attributable to a federally declared disaster, it is deductible as a personal itemized deduction on IRS Schedule A. Such losses are deductible only if and to the extent that they exceed 10% of the taxpayer's adjusted gross income (AGI). Moreover, the first $100 of such losses are not deductible.
]]>Once you learn more about this kind of loan and the issues your heirs might face if they want to keep the property, you might think twice about getting one.
A "reverse" mortgage is a loan in which older homeowners convert some of their home's equity into cash. The most popular type of reverse mortgage is the FHA-insured Home Equity Conversion Mortgage (HECM). The insurance protects the lender, not the borrower.
With a HECM, the loan typically has to be repaid when the borrower dies, or another specific event happens, such as the borrower moves to another home or leaves due to health reasons for 12 consecutive months or longer.
When a person with a reverse mortgage dies, the heirs can inherit the house. But they won’t receive title to the property free and clear because the property is subject to the reverse mortgage lien.
So, say the homeowner dies after receiving $150,000 of reverse mortgage funds. The heirs inherit the home subject to the $150,000 debt, plus any fees and interest that have accrued and will continue to accrue until the debt is paid off.
Under the terms of a HECM, those who inherit a home subject to a reverse mortgage get four options.
According to a 2019 article published in USA Today, heirs who want to pay off a reverse mortgage and keep the home often face months of red tape and frustration when dealing with the loan servicer.
Shoddy loan servicing practices can hinder what should be routine paperwork, debt calculations, and communications with borrowers or heirs.
As the article notes, the daughter of one reverse mortgage borrower sent in a form indicating she wanted to purchase the property and was approved for traditional financing. But she still received a notice of default, the first step in a California nonjudicial foreclosure.
The servicer also designated the home as vacant turned off the water in the name of property preservation, and scheduled a foreclosure sale. This situation isn't uncommon.
The U.S. Department of Housing and Urban Development (HUD), the regulator of HECMs, has guidelines that say servicers of these loans should inform survivors and heirs of their options and resolve the loan within six months of a death.
So, generally, under the guidelines, heirs should have six months to satisfy the debt. If they're selling the property and it's still on the market after six months, or they're still actively seeking financing, heirs can contact the servicer and request a 90-day extension, subject to approval by HUD. One more 90-day extension can be requested, again with HUD's approval. But the guidelines don't prevent the servicer from pursuing a foreclosure during this time. In fact, HUD’s policies require servicers to initiate foreclosure within six months of a default.
While you face delays or roadblocks due to an issue with the property's title, an impending foreclosure, or a lack of information from the servicer, you'll have to pay for the home's upkeep, taxes, and insurance. Interest and fees will continue to accrue on the debt while you try to work out any of the above options.
Also, heirs have noted that servicers often won't negotiate or communicate during the workout process, and homes are foreclosed in many cases.
If you have a reverse mortgage and want to leave your home to your children, communicate with them about the loan and their repayment options. Giving them details about the loan, including the loan balance, interest rate, and what will happen when you die, will help them decide what to do with the house. You should also inform your heirs about their options, such as repaying the loan balance or selling the property to pay off the debt.
You might also consider talking to a professional about creating an estate plan. For example, you might want to get a life insurance policy sufficient to pay off the reverse mortgage balance when you die.
Reverse mortgages are complicated and often not the best option for older homeowners seeking access to extra cash. Before taking out a reverse mortgage and tapping into your home equity, you should explore all available options. For instance, you might qualify for a state or local program to lower your bills or consider downsizing to a more affordable home. You can learn more about reverse mortgages and other options for older homeowners at AARP’s website at www.aarp.org/revmort.
Even though you'll have to complete a counseling session with a HUD-approved counselor to get a HECM, it's also highly recommended that you consider talking to a financial planner, an estate planning attorney, or a consumer protection lawyer before taking out this kind of loan.
If you inherited a home subject to a reverse mortgage and the lender has started a foreclosure (or you're having trouble dealing with the loan servicer), talk to a foreclosure lawyer to learn about your rights and options.
]]>An HOA is not a faceless entity. After the early days of a development's construction, when people have moved into the community, the HOA will ordinarily be composed of homeowners including you and your neighbors, some of whom might decide to take on board leadership roles there.
The HOA will nevertheless exercise a great deal of control over how you use your property, and perhaps not always in ways you appreciate. What's more, the very safety and quality of your property depend on the HOA coming together and agreeing on how to guard against problems and prepare for the future.
The June, 2021 collapse of a Florida condo building provided a tragic example of what can happen when HOA members cannot agree on matters concerning maintenance and upkeep. News reports said the HOA board president was concerned about structural problems laid out in a 2018 inspection report, but repairs were estimated to likely cost over $15 million. This led to debate among condo owners, many of whom were reluctant to foot a portion of this huge bill. Unfortunately, they had less time than they thought in which to debate and plan. Many died in the disaster.
At a more everyday level, you and every property owner in your community will need to abide by various written HOA rules, as discussed below. The HOA board will be responsible for enforcing those rules and otherwise managing and overseeing community finances (including collecting regular dues), repairs and upkeep, and so on.
You'll want to decide whether to let others be in charge of important aspects of your life or to serve on the HOA board yourself. Serving on the board has the advantage that, if the time comes when you wish to voice a concern or request an exception, you'll already be known and hopefully trusted within the community.
Buying a home in a development is different than buying a regular home, both legally and practically. Even what you literally own will be different. You will probably own the actual structure of your house (except if you purchase a co-op, in which case you will own only shares in the corporation that owns the property).
You might or might not own the land underneath your structure. You will also own a share of "common areas," such as sidewalks, a community recreation center, a golf course, and a gym.
The short of it is, you will be literally buying into a community, which comes with various rights and obligations. To reflect this unique mode of ownership, your paperwork will include a transfer deed, which will not only show you as the new owner, but will also set forth limitations on how your property can be used. These limitations are often called covenants, conditions, and restrictions, or CC&Rs.
Expect your CC&Rs and other community rules to cover all or many of the following parts of your property, or your behavior when living on that property or remodeling it. Examples include:
In some situations, particularly aesthetic ones, the CC&Rs might not set out actual guidelines, but might make your plans subject to approval by the HOA board. An example might be what type of changes to your front-yard landscaping you can make. And more broadly speaking, the CC&Rs might prohibit property owners from creating nuisances or annoyances (such as with barking dogs, loud music, or constant barbecues), which the board will likely also weigh in on.
If someday you want to make a structural change to your house, such as building a fence or adding a room, you'll likely need formal permission from the association (on top of having to comply with city zoning rules). Don't count on getting around the issue of needing extra space by bringing in a boat, RV, or tent, either; it's likely to be prohibited as a living space, if you're allowed to park it on the property at all.
You'll definitely want to read the CC&Rs and other relevant documents carefully before you finalize your purchase. Fortunately, state law and real estate practice normally requires that prospective buyers receive a copy of the CC&Rs and other documents before the closing.
Remember, even if the house's setting and location are just what you want, and the model home (if construction hasn't yet been completed) or already-built home look to be perfect, if the CC&Rs aren't compatible with your lifestyle and future plans, this might not be the place for you.
What if, for example, you'd like to consider having another child, in which case you'd need to add a room; but the CC&Rs prohibit expanding the house? Or what if you are considering taking a sabbatical abroad in a couple of years, but the CC&Rs prohibit renting out your unit, and you can't afford to live elsewhere while paying ongoing community dues?
If you don't understand something in the CC&Rs (or the whole document looks like legalese and gobbledygook), ask the property sellers for more information, and seek legal advice if necessary.
The governing boards of some associations enforce every rule on the books, with no room for leeway. Others are run in a more relaxed fashion. Enforcement depends largely on the personalities of the people who decide to serve on the board and their sense of how important it might be to, for example, insist that a neighbor replace curtains that don't quite fit the required color palette.
Most responsible associations try to make decisions that will enhance the value of the houses. That is, after all, the purpose of having CC&Rs: to provide standards that the community agrees to live by, for the benefit of all owners. You won't have to worry about issues like a neighbor parking three rusting, dead cars in the driveway.
Then again, HOA board members are people, and it's not unheard of for them to play favorites, use bad judgment, or become apathetic and refuse to make a decision. (In fact, you might want to read about How to Remove an HOA Board Member.)
Getting relief from portions of your CC&Rs that feel overly restrictive is not easy. You would most likely want to first ask for an exception, rather than an out-and-out rule change. That normally means submitting an application (with a fee) for a variance, getting your neighbors' permission, and possibly going through a formal hearing before the board.
In order to change the rules themselves, you would need to follow procedures set forth in the HOA's governing documents, most likely the bylaws. This also is most likely to work if you have a good deal of community support; particularly if the bylaws actually require a majority vote by both the board and community membership before changing the rules, as is common. Also realize that the HOA will need to make sure the new rule doesn't run afoul of any state laws governing HOAs; which might take time, and require hiring an attorney to research.
By the same token, you'll need to be prepared for the board to add new rules even after you move in! You might or might be grandfathered in, if you were "breaking" this rule already, prior to the change.
One of the main reasons people buy into a development is to avoid some of the maintenance that comes with regular homeownership. Tasks like landscaping, snow removal, repainting of the exterior, and fence, roof, or furnace repair will likely be handled by the HOA. If there's a pool, community room, clubhouse, or recreational facility, it won't be up to individual homeowners to clean it.
However, homeowners' associations normally require members to pay fees for common property maintenance (and for insurance in case of damage), another practice expressly permitted by the CC&Rs. You'll find out the current monthly fee amounts when you buy in, but the future is less predictable.
HOA fees are often in the several hundreds of dollars per month. It's much like paying rent on top of a mortgage. Fees tend to run particularly high in developments with a pool, golf course, or other recreational facility.
Many HOA's rules let their boards raise regular assessments, usually up to 20% per year, and levy additional special assessments with no membership vote for capital improvements like a new roof. What's more, a responsible HOA will always set aside some cash reserves, for unexpected expenses or emergencies.
If you are on a tight budget, check the HOA fees before buying in. Also look into how easy it is for the board to increase the fees. See these FAQs for more information on HOA fees.
When you buy into a common interest community, your financial future becomes somewhat intertwined with that of your fellow owners. In the event of a major economic downturn, your neighbors might actually stop paying their HOA fees, to the point where their properties are foreclosed on and perhaps sit empty. Other people might not want to buy into the community if they see that the entire thing is underfunded and spiraling downward.
While major crises like these are rare, you'll want to do your research, and be alert to the possibility of financial or legal trouble.
If parts of the development you are considering have already been occupied for a while, one way to do your research is to attend an HOA board meeting to hear what's on owners' minds and what's big on the agenda. Talk with the HOA officers about financing, any ongoing legal disputes or repair issues, and other issues of concern.
For further information on how to find the right type of home to buy, see Nolo's Essential Guide to Buying Your First Home, by Ilona Bray, J.D. and Attorney Ann O'Connell (Nolo).
]]>(Don’t even think about prepaying, however, if you have other high-cost debts to pay off! Credit card interest rates typically run at double or triple that of most home mortgage loans. Any extra cash you bring in should go toward paying off those balances first.)
Although your mortgage company has carefully worked out a calendar of payments, the amount of interest owed is always based on the remaining unpaid principal. In other words, it can change over time if you pay more principal than your lender expected you would.
The result is that by making prepayments, you can shave thousands off the interest you’ll pay in the long term. This is particularly true if you prepay in the early years, when your scheduled payments are probably made up of far more interest than principal.
For example, if you have a $300,000 mortgage at 5.5% on a 30-year, fixed-rate mortgage, and you make the minimum payment, you’ll pay about $313,000 in interest over the life of the loan. But by paying just $100 extra each month, you’ll pay the loan off almost four years earlier and spend only about $267,000 on interest. To run these numbers for your own mortgage, go to a calculator called How much will I save by increasing my mortgage payment?
While you’re at it, if your down payment was low enough that you had to purchase private mortgage insurance (PMI), paying down the mortgages early will help you end this obligation.
Prepaying your mortgage also gives you future freedom. Eventually, if you keep up your prepayments, you’ll pay it off entirely. With this shorter mortgage term, you’ll know that you can remain in your home for the ensuing years with no threat of losing it to a bank. And you no doubt have plenty of ideas for spending that money!
So what’s the downside? Money spent prepaying your mortgage cannot be invested or spent on other things. For example, if you know you want to remodel your kitchen in a few years, and would have to borrow money and pay interest to do so; or worse yet, planned to put a lot of the work on a credit card; it might make more sense to save and invest the money you’d otherwise spend on prepayments.
Also, you’ll need to balance your retirement goals against prepaying your mortgage. First off, if your employer matches contributions to a 401(k), you don’t want to turn away that free money.
Also take into account what you might earn by investing the money. The earlier you start saving, the more your money will grow by the time you’re retired, thanks in part to the power of compound interest: As you earn money on your investment, that cash is reinvested, earning interest on interest.
Another important financial consideration is protection against risk of job loss, death, or disability. If you have dependents, for example, you might want to buy life insurance. Disability insurance is also a good way to protect against unexpected health issues. And if you haven’t yet put aside an emergency fund (a savings set-aside that will cover your expenses for six months to a year if you lose your job) that should probably take first priority.
Also realize that the financial benefits of prepaying a mortgage are, on balance, reduced a bit if you can deduct mortgage interest from your taxes.
Talk to a financial adviser for a complete analysis.
]]>These taxes go by different names—for example:
Here, we'll discuss what constitutes a short-term rental, how sales tax works, and what penalties you'll face if you fail to pay.
Sales and/or lodging taxes are only due on income owned from "short-term rentals." So, for example, a landlord who rents out a home on an annual basis doesn't have to pay these taxes.
What constitutes a short-term rental varies from state to state. In many states, any rental less than 30 days is considered short term. However, in some states, short-term rentals are defined as less than 28 days. In other states, rental periods of up to six months might be considered short-term and therefore subject to sales taxes.
Moreover, in some areas, rentals of private homes are entirely exempt from these taxes. In addition, many states have “casual use” rules that excuse rentals for only a few days per year from such taxes.
The taxes we're discussing are completely separate from income tax and are not collected by the IRS. They are collected by your state, county, and/or city. Like all sales taxes, they are paid by the person who purchases the goods or services (the vacation home renter), not the person who provides them (the vacation home owner).
Your role is limited to collecting the taxes and remitting them to the appropriate state and/or local agency. Depending on where your property is located, you might have to pay the sales tax you collect every month or every quarter (every three months).
The amount of local taxes varies, as does how they are calculated. They can be based on a flat fee, rental percentage, number of guests, number of nights the guests stay, type of property involved, or a combination of any of these. In some areas, there is one rate for the entire state; in others, sales tax rates vary from city to city or county to county.
On average, they equal about 12% of the income earned from the short-term rental (including rents, cleaning fees, and other fees). The taxes are typically due monthly or quarterly. The due dates can vary depending on the amount of tax owed.
For example, if you rent out your vacation home for one month and earn $2,000 in total revenue for the month and your sales tax rate is 12%, you’ll have to charge your renters $240 in sales taxes. You must collect and remit the funds to the appropriate agencies. This could be a state, county, and/or city agency.
You can find excellent summaries of the state and local short-term rental tax rules for each state on the Avalara website.
In many locations, Airbnb and VRBO have entered into agreements with the local governments involved to collect and remit occupancy taxes on behalf of hosts. In many areas, this is done automatically. Check your listings on the short-term rental platform(s) you use to determine for sure if sales taxes are being automatically collected. If not, you can usually manually direct the platform to collect the taxes.
Many vacation home owners are unaware that they need to pay sales tax on short-term rentals, and simply don't collect them. Some go years without collecting such taxes.
If you're in this boat, contact your state, county, and/or city sales tax agency to find out what you should do. Coming forward voluntarily can help lower your tax bill because many sales tax agencies will waive the penalties due when you do so.
For more on taxes and short-term rental properties, see Every Airbnb Host's Tax Guide, by Stephen Fishman.
]]>You can seek tax relief using both methods, which we'll discuss below.
You might know that New Jersey tax authorities compute your property tax by multiplying your home’s taxable value by the tax rate. While you cannot directly affect the tax rate (except through local elections!), you might be able to challenge the taxable value of your home.
Consider this example: Alexander and Eliza own a home in New Jersey. The county tax assessor has determined its taxable value to be $300,000. If the tax rate is 1%, Alexander and Eliza will owe $3,000 in property tax. Alexander and Eliza file an appeal, including evidence that a recent natural disaster has lowered their home's value. The appeals board agrees and reduces that value to $250,000. Now Alexander and Eliza owe only $2,500 in property tax on their New Jersey home. (Assuming these values stay constant, they're likely to save many thousands of dollars over the course of their lives from this one minor adjustment.)
New Jersey's Department of the Treasury offers a handy guide to appealing your property tax assessment. Again, the exact process will vary by county, but essentially, you'll need to show why the value of your home is lower than the assessor believed. Perhaps the assessor mistakenly thought your home was larger than it is, or was in better condition. Such issues could be the subject of an appeal.
New Jersey allows for reduced property taxes if you meet certain requirements. Below is a summary of the chief programs in New Jersey.
Basic homestead rebate or credit. Many New Jersey homeowners are entitled to a rebate or credit that's a percentage of the first $10,000 in property tax that they paid last year. The percentage depends on the owner’s annual income (the higher your income, the lower the percentage). If your annual income exceeds $250,000, you will not qualify for any rebate or credit. (See N.J.S.A. § 54:4-8.59.)
Veterans. The home of a totally disabled veteran is exempt from property tax, as can the surviving spouse. (See N.J.S.A § 54:4-3.30.) Otherwise, a veteran who actively served in time of war can get a property tax credit of $250, which is also available to the surviving and unmarried spouse of such a veteran. (See N.J.S.A. § 54:4-8.10 et seq.).
Seniors. If 65 years of age or older, you can get an additional $250 homestead rebate. However, your income cannot be over $10,000 per year. (See N.J.S.A. § 54:4-8.41.)
Blind or disabled people. Homeowners who are blind or otherwise disabled within the meaning of New Jersey law, or their surviving and unmarried spouses, may also qualify for a $250 additional rebate, on the same income terms as for seniors. (See N.J.S.A. § 54:4-8.40 et seq.)
Senior tax freeze. Additional tax benefits are available if: (1) you are 65 years old or older, or receiving Social Security disability payments; (2) you have lived in New Jersey continuously for ten or more years; (3) you've lived in your current home for at least the last three years; (4) you've kept current with paying your property taxes; and (5) you meet certain income limitations. If you can jump through all these hoops, you may qualify for reimbursement of some property tax increases. This can become complicated, but is worth exploring. (See N.J.S.A. § 54:4-8.40 et seq.)
For more information on potential property tax exemptions, take a look at New Jersey's online guide to deductions, exemptions, and abatements, compiled by the Department of Taxation.
Although New Jersey laws set statewide property tax rules, your local government handles the administration and levying of the tax. Contact your local tax assessor for complete details on property tax exemptions. Be sure to ask about any forms you need to complete and deadlines for filing them.
In addition to the property tax, which is based on the assessed value of your home, your tax bill might include special assessments. Typically these are made to pay for improvements, such as street paving or repaving, in your neighborhood.
Depending on the complexity of your situation, you might wish to seek legal, tax, or accounting help to reduce your New Jersey property tax bill.
]]>There are two primary methods of reducing your tax burden, including:
(See Florida Statutes § 194.011(2).) If you meet any of those qualifications, you may seek tax relief using both methods. We'll discuss both here.
Florida authorities compute homeowners' property tax by multiplying the home’s taxable value by the applicable tax rate. A property appraiser is supposed to physically inspect one's property at least once in every five years.
For example, imagine that the tax appraiser has placed a taxable value of $200,000 on your home. If the tax rate is 1%, you will owe $2,000 in property tax. You could, if that seems excessive, contest the $200,000 taxable value of your home, claiming that it's not worth that much. You'd need to back up by evidence, of course.
Your first step can be an informal conference with the property appraiser's office. Perhaps you'll show that nearby, comparable houses are worth less. Or perhaps something has changed; for example a neighboring vacant lot has been turned into a three-story condominium unit that puts your house into constant shade. Be sure to supply any relevant documentary evidence and photos. You can also ask the the appraiser visit your property in person for a look. (Florida Statutes § 193.023.)
If you don't convince the Florida property appraiser's office, you can go up a level and file a more formal appeal, asking the Value Adjustment Board (VAB) to reduce your home's taxable value. If they took it down to $150,000, for instance, you'd owe only $1,500 in property taxes.
The Florida Department of Revenue offers guidance to homeowners seeking to contest their property tax assessments.
Florida allows for reduced property taxes if the homeowner meets certain requirements. The chief programs in Florida are summarized here.
Contact your local tax appraiser for complete details on these and other Florida exemptions, including any required forms you need to complete and the deadline for filing initial or subsequent claims. For contact information for the tax appraiser’s office in your county, see the website of the Florida Department of Revenue.
Property taxes are not always straightforward, as you can probably appreciate from this short article. Depending on the complexity of your situation, you might want to seek help from a property lawyer. To find an experienced real estate lawyer in Florida, check out Nolo’s Lawyer Directory.
]]>What can you do to reduce your property tax burden? There are two methods to consider, including:
We'll discuss both below. The first method is available to all Georgia homeowners. The second depends on whether you (and your home) meet certain qualifications under the applicable tax regulations. If so, you can seek tax relief using both methods.
Remember, most homeowners tend to remain in their homes for years or even decades. Even a seemingly modest downwards adjustment to your Georgia tax assessment can add up significantly over time.
You might know that the Georgia tax authorities compute property tax by multiplying a home’s taxable value by the applicable tax rate. To see how this process works, consider this example:
David and Patricia own a two-bedroom home in the suburbs of Atlanta. The assessor has placed a taxable value of $200,000 on the property. If the tax rate is 1%, David and Patricia will owe $2,000 in property tax. However, imagine that they believe, based on evidence, that their assessment is too high, and appeal the $200,000 taxable value. The appeals board reduces that value to $150,000. Now, Patricia and David owe only $1,500 in tax on their Georgia home.
To get contact information for your tax assessor and information about the process for filing appeals, go to the Georgia assessor's website, and click on the alphabetical list of county names.
If you believe that the tax assessor has misjudged the value of your home, for example, by stating that it is larger than it really is, or if the taxable value is suspiciously higher than that of similar homes in the neighborhood, pursuing an appeal could make good sense.
Georgia law allows for reduced property taxes if the home and its owner meet specific requirements. Below is a summary of the most common such tax reduction categories for Georgia homeowners to consider. (Also see Georgia Code § 48-5-40 and following.)
The home of each Georgia resident that is owner-occupied as a primary residence may be granted a $2,000 exemption from most county and school taxes. The $2,000 is deducted from the 40% assessed value of the homestead. The owner of a dwelling house of a farm that's granted a homestead exemption may also claim a homestead exemption in participation with the program of rural housing under contract with the local housing authority. (See Georgia Code § 48-5-44.)
Were you married to a police officer or firefighter who was killed in the line of duty? If so, and if you have not remarried, your Georgia home is 100% exempt from any property tax. (See Georgia Code § 48-5-48.4.)
If you are 65 years old or older, and your net income the previous year was $10,000 or less, you qualify for a $4,000 property tax exemption. (See Georgia Code § 48-5-47.)
If you’re 62 years or older and your family income doesn't exceed $30,000, a part of your home might be exempt from county tax (the "inflation-proof" exemption). The exact amount of the exemption depends on how much this year’s assessed value of your property exceeds last year’s. (See Georgia Code § 48-5-47.1.)
If you're 62 years old or older and living within a school district, and your annual family income is $10,000 or less, then up to $10,000 of your Georgia home’s value could be exempt from the school tax. (See Georgia Code § 48-5-52.)
A blind or disabled veteran who was honorably discharged or the unmarried surviving spouse of such a veteran qualifies for a substantial Georgia property tax exemption based on complex rules concerning level and type of disability, property value, and more. (See Georgia Code § 48-5-48.)
A similar exemption is available to the unmarried surviving spouse of a United States armed forces member who died in a war or conflict involving the United States military. (See Georgia Code § 48-5-52.1.)
Although Georgia laws set statewide property tax rules, your local government handles the administration and levying of the tax. Contact your local tax assessor for complete details on property tax exemptions. Be sure to ask about any forms you need to complete and the deadline for filing those forms.
In addition to the property tax, which is based on the assessed value of your home, your tax bill might include special assessments. Typically these are made to pay for neighborhood improvements, such as street paving or repaving.
Depending on the complexity of your situation, you might want to seek legal help to reduce your Georgia property tax.
]]>Whether you want to notify the servicer about an error or get information about your account, you must send your servicer a letter. Under amendments to Regulation X, which implements RESPA, your letter will be considered a “notice of error” or a “request for information.”
Different time limits apply for when the servicer must respond to your letter based on the type of request you send.
If you send a letter to notify the servicer about a particular error that it made when managing your loan, the servicer must correct the error, provide notification of the correction, and give contact information for you to follow up, or let you know that no error occurred along with the reasons for this conclusion.
With so many duties and variables, there's a lot of room for error in loan servicing. Under the law, the following servicer errors can be addressed in a notice of error:
The servicer must acknowledge a written notice that asserts a particular error within five business days.
How much time the servicer gets to respond to your notice of error depends on the type of error that you claim the servicer committed:
The servicer may generally extend the 30-day period by 15 days if, within the 30 days, it informs you about the extension and tells you why there is a delay.
However, a 15-day extension isn't allowed if your notice of error concerns a payoff statement or specific errors about foreclosure.
A request for information can be useful if you’re unsure whether the servicer made an error and want to get information about your account to help you make this determination. For example, you might want to see the servicer's records regarding your payment history.
If you send a written request for information, the servicer must acknowledge your inquiry within five days.
The servicer must generally give you the information you requested within 30 business days or explain why the information is not available, as well as provide you with the name and contact information of someone you can follow up with.
The servicer gets 15 extra days to respond if it notifies you about the extension within the 30-day period and lets you know the cause of the delay.
The servicer must provide the information you requested within ten business days if you’re trying to find out the identity, address, or other contact information for the owner of your mortgage loan.
The servicer doesn't have to address your notice of error or request for information in some situations, like if:
But the servicer can't just ignore your notice, even if it fits one of the four criteria above. It must notify you within five business days after determining that it doesn’t have to deal with your notice or request and give you the basis for the determination.
You can find a sample notice of error letter and request for information letter, along with useful information about what to include in the letter, at the Consumer Financial Protection Bureau’s website.
If you’re sending a notice of error and also want to request specific information, you can send a single letter. Or you can send your notice of error and request for information letters separately.
If your servicer doesn’t respond to your notice of error or request for information, disagrees that it made an error, or refuses to provide certain information, consider consulting with a lawyer.
Talk to an attorney immediately if you're facing an imminent foreclosure sale. Sending the servicer a notice of error or request for information is very unlikely to stop a foreclosure. An attorney can advise you about what to do and help you enforce your rights.
It's also a good idea to talk to a HUD-approved housing counselor if you're having trouble with your mortgage payments or facing a foreclosure.
]]>We'll discuss all of these below.
The home mortgage deduction is a personal itemized deduction that you take on IRS Schedule A of your Form 1040. If you don't itemize, you get no deduction. You should itemize only if your total itemized deductions exceed the applicable standard deduction for the year. In the past, most people who owned homes itemized because their interest payments, property taxes, and other itemized deductions exceeded the standard deduction.
However, the TCJA roughly doubled the standard deduction to $12,000 for single taxpayers and $24,000 for marrieds filing jointly. As a result, far fewer taxpayers will be able to itemize—as few as 5% of taxpayers. This means far fewer will benefit from the mortgage interest deduction.
You’re not allowed to claim the mortgage interest deduction for someone else’s debt. You must have an ownership interest in the home to deduct interest on a home loan. This means that your name has to be on the deed or you have a written agreement with the deed holder that establishes you have an ownership interest. For example, a parent who buys a home for a child that is in the child's name alone cannot deduct mortgage interest paid on the child's behalf.
You can deduct the interest on a home mortgage only for:
If you have a second home and rent it out part of the year, you also must use it as a home during the year for it to be a qualified home. You must use this second home more than 14 days or more than 10% of the number of days during the year that the home is rented at a fair rental, whichever is longer. If you do not use the home long enough, it is considered rental property and not a second home.
There is a limit on the size of a home mortgage for which interest is deductible. If you purchased your home before December 15, 2017, you may deduct mortgage interest payments on up to $1 million in loans to buy, build, or improve a main home and a second home. If you purchased your home after December 15, 2017, new limits imposed by the TCJA apply: You may deduct the interest on only $750,000 of home acquisition debt: a reduction of $250,000 from prior law. The $750,000 loan limit is scheduled to end in 2025. After then, the $1 million limit will return.
Before 2018, you could deduct the interest on up to $100,000 in home equity loans. You could use the money for any purpose and still get the deduction—for example, homeowners could deduct the interest on home equity loans used to pay off their credit cards or help pay for their children’s college education. The TCJA eliminated this special $100,000 home equity loan deduction for 2018 through 2025.
However, the interest you pay on a home equity loan used to purchase, build, or improve your main or second home remains deductible. The loan must be secured by your main home or second home and your total loans may not exceed the cost of the home. Such a home equity loan counts towards the $750,000 or $1 million loan limit and the interest is deductible only on loans up to the limit.
Example: In January 2023, a taxpayer takes out a $500,000 mortgage to purchase a $800,000 main home. In February 2023, the taxpayer takes out a $250,000 home equity loan to put an addition on the main home. Both loans are secured by the main home and the total does not exceed the cost of the home. Because the total amount of both loans does not exceed $750,000, all of the interest paid on the loans is deductible. If the home equity loan was for $300,000, the interest on $50,000 of the loan would not be deductible. However, if the the home equity loan was used for personal expenses, such as paying off student loans and credit cards, none of the interest on the home equity loan would be deductible.
U.S. tax law says that the home mortgage interest deduction must be cut in half in the case of a married person filing an individual return; in other words, a married person filing separately can deduct the interest on a maximum of $375,000 for a home purchased after December 15, 2017, and $500,000 for homes purchased before that date. The purpose of the 50% reduction is to prevent married home owners who file separately from each claiming a full deduction, thereby doubling their total mortgage deduction.
If each spouse's name is on the mortgage and each pays half the interest, they'll each get 50% of the mortgage interest deduction on their separate return. In this event, there might not be much difference in their total tax liability than if they had filed jointly.
However, if only one spouse's name is on the mortgage, the 50% reduction can be brutal. This is because the spouse who is not on the mortgage gets no deduction, while the spouse whose name is on the mortgage gets only a 50% deduction. Such a couple would be better off staying unmarried because the 50% reduction in the mortgage interest deduction applies only to married people who choose to file separately, not singles who must file that way.
For more on this subject, see Deducting Mortgage and Other Interest. Also, IRS Publication 936, Home Mortgage Interest Deduction provides extensive information on this topic.
]]>Vacant homes are targets for theft and vandalism. Therefore, when a homeowner’s mortgage payments become delinquent, one of the first things many lenders do to protect their interest in the property is to look into whether the owner has abandoned it. Typically, a lender will hire an outside company (known as a field service company) to inspect the property. Some field service companies jump the gun, and declare a home is abandoned without having first performed proper diligence. (Various are laws might prohibit this, but the field service companies don't always follow these.)
In some cases, the company makes the determination of abandonment after just one visit, perhaps based on seeing an overgrown lawn and old newspapers and pizza flyers on the front porch; yet having made no effort to contact the homeowner. (For further information on this, see The Bank Changed My Door Locks But My Home Is Still in Foreclosure. What Should I Do?)
To secure the seemingly abandoned property for the lender, the field company might go so far as to change the locks and remove your personal belongings. Upon returning, you’d find you cannot get into your own home. You would then need to negotiate with the lender, the sheriff’s office, or even the courts to regain possession. Retrieving any personal items that were taken away during your absence might prove difficult.
With proper preparation, however, you can avoid such problems. Ensure your mortgage payments are up to date before leaving, and that they remain current while you’re away, perhaps with automatic online payments. If you cannot catch up on your payments before leaving, or you become overdue at any time while away, notify the lender by phone of your plans to return. Keep a written record of all calls you make to the lender. Also send the lender a written notice (by certified mail, or another means where a return receipt is provided), informing it that, despite your time away, you are still living in the property. Inform the lender where you can be contacted.
If possible, also tell a trusted neighbor about your intended return date and give your contact information, in case a field service company asks neighbors about your home.
A number of bills must be paid even when your property is vacant. If you are or become delinquent on your property taxes, the government will probably assess late fees and fines. If the delinquency remains outstanding, the government might place a lien on your home.
A number of problems can also result from unpaid utility bills. For example, the service provider might cut off your heat, resulting in frozen pipes, expensive damage, water leaks, and high water bills. Or, your phone or water service might get turned off, requiring you to pay all past bills plus a steep reconnection fee upon your return.
Allowing bills to remain delinquent can negatively affect your credit rating. You might return from your vacation to find you need to spend a large amount of time and money eliminating liens and rectifying bad credit.
These problems can be avoided with a little preparation. Double check that you are current on all utilities and tax bills prior to leaving. Then arrange to either prepay upcoming bills, have them forwarded to you while you're away, or sign up for automatic electronic payments before you leave.
If your home is in a planned community, you are responsible for keeping current with all dues and fees owing to the homeowners' association (HOA). An HOA typically has the right to assess late fees, place a lien on an owner’s property for delinquent amounts, and perhaps prevent delinquent owners from using any common areas in the development until current on all payments. You could possibly even return home to find you can’t access your home, if you must pass through a common entrance gate.
To avoid such problems, make sure all to pay all outstanding dues and fees before departing, and stay current during your absence. Talk with an HOA representative before you leave to find out the amount you’ll owe, including any special assessments that might be in the pipeline.
Planned developments typically also have a number of rules that homeowners must abide by. For example, regulations against leaving trash in yards are quite common, or restrictions on leaving a car sitting in one place too long. Most HOAs have the power to assess fines for any rule violations, often as a per-day amount (such as $50 per day for each day trash remains in the yard). That could add up to a tidy sum if you are away and in violation for an extended period. The HOA might also have the right to put a lien on your home for outstanding fines arising from violations.
To avoid such problems, review the restrictions in your development’s governing documents, and ask the HOA whether there are any rules you should be aware of before you depart. Then follow up. If, for example, trash on the property is prohibited, hire a person, or a management company, to remove litter or junk mail a few times a week. If you can't leave your car parked outside, find someplace to store it.
Many homeowners are unaware that, under most standard homeowners' insurance policies, theft, damage, or other problems occurring after a home has been vacant for an extended period of time (typically around 30 days) are not covered. Homeowners' insurance policies commonly exclude such coverage, due to the greater risk of theft or damage to a home that no one is living in and thus watching over. If you attempt to make a claim for losses that occurred while you were away, you might be denied under such an exclusion, or even be liable for insurance fraud.
Review your policy and talk with your insurance agent. If necessary, you might purchase an endorsement to your policy to provide coverage for your home while it's vacant. If such an endorsement is not available, consider purchasing a separate, “vacant home” insurance policy. These are typically quite affordable, and offered for specific terms such as 30 days, six months, or a year.
Be open and honest with your insurance company prior to your departure. This can save you a great deal of hassle and expense in the event of a break-in or other damage to your home while you’re gone.
Vacant homes sometimes attract “squatters;” people who move in uninvited, perhaps pretending to be new owners or renters. This tends to occur most often in neighborhoods where the neighbors don’t really know each other, or in more remote areas where there are no neighbors. Even if squatters don’t move in, thieves and vandals might be an issue.
Again, prior preparation can protect you. Make sure your home is locked tight, including all windows and exterior (and attached garage) doors. Activate the home’s security system or consider installing one. If you use a security company, inform it of your dates of absence. Use motion sensor exterior lights.
Also try to make the home look lived in while you're away. For example, have a neighbor or maintenance service mow the lawn or shovel the snow as needed. Contact the post office to have your mail forwarded (or put on hold) and suspend any newspaper deliveries. Ask someone to check on the place regularly and deal with such issues as a broken branch blocking the front walk or flyers hanging from the door handle.
Prior preparation can prevent you from returning to find your valuables missing, graffiti on your walls, or even someone else living in your home! It’s well worth a bit of planning, to help ensure you have a relaxed, worry-free trip.
]]>(See 26 U.S. Code § 267.)
The U.S. tax code contains a simple rule to prevent family from creating fake tax deductions: You cannot deduct a loss on the sale or trade of property if the transaction is directly or indirectly between you and a relative.
Example: Marc owns a rental property with a $100,000 adjusted basis. He sells it to his daughter Marcia for $75,000. He may not deduct any part of his $25,000 loss.
For these purposes, "relatives" includes your brothers and sisters, half-brothers and half-sisters, spouse, ancestors (parents, grandparents, etc.), and lineal descendants (children, grandchildren, and so forth). Thus, for example, cousins and in-laws are not relatives for tax purposes.
What happens to such losses, in tax terms? They go to the relative who purchased the property. But the tax law restricts how they may be deducted.
A relative who purchased the property and later resells it to an unrelated third party at a gain may deduct the previously disallowed loss from the gain. However, this deduction is limited to the amount of the gain from the sale to the third party. Any loss above this amount effectively disappears for tax purposes.
Example: Marcia resells the rental she purchased for $75,000 from her father to an unrelated third party for $90,000, realizing a $15,000 gain ($90,000 sales price - $75,000 basis = $15,000 gain). Marcia may deduct from her gain $15,000 of the $25,000 loss that was disallowed when she purchased the property from her father. The remaining $10,000 of this loss disappears.
However, if you sell property you acquired from a relative at a loss, you cannot deduct the previously disallowed loss at all. The entire loss disappears.
Example: Assume that Marcia sold her rental property for $60,000, resulting in a $15,000 loss (remember, she purchased the property for $75,000). She may deduct this loss. But she cannot deduct any part of the previously disallowed $25,000 loss. It is lost forever.
If you sell or trade to a relative a number pieces of property in a lump sum, you must figure the gain or loss separately for each piece of property. The gain on each item might be taxable. However, you cannot deduct the loss on any item. Also, you cannot reduce gains from the sales of any of single piece of property by losses on the sales of any other piece of property.
The moral: Don't sell business or investment property at a loss to relatives.
For more information on the subject, see IRS Publication 544, Sales and Other Dispositions of Assets.
]]>How can you reduce your Texas property tax burden? There are two primary avenues for doing so, including to
You can seek tax relief in Texas using either or both methods.
You might know that the Texas authorities compute your property tax by multiplying your home’s taxable value by the tax rate. But you might not know that Texas has 254 counties, each with its own county assessors, each of which have their own processes for "assessing" (valuing) local properties.
Both property tax rates and home values are determined by these local state government officials. Property tax rate information for your county, along with contact information for local assessors, can be found on the website of the Texas Comptroller's Office.
Here's an example of how assessment and valuation affects homeowners: Imagine that George and Barbara own a home in Austin, upon which the assessor has placed a taxable value of $200,000. If the tax rate in their county is 1%, George and Barbara will owe $2,000 in property tax. Believing that their valuation is too high, they appeal the $200,000 figure. The appeals board reduces that value to $150,000. Now, George and Barbara owe only $1,500 in property tax on their Texas home.
If you believe that the tax assessor has misjudged the value of your home, or if the taxable value is higher than that of similar homes in your neighborhood (of similar size, condition, and so on), you might wish to contact your Texas county assessor to pursue an appeal.
Texas law allows for reduced property taxes if you meet certain requirements. Specifically, Chapter 11 of the Texas Tax Code provides various "exemptions" to property taxes, depending on the specific regulations within your county. In some cases, you'll need to file an application proving you qualify, either one-time or annually.
The chief programs in Texas are summarized here.
You can learn more about property tax exemptions on the Comptroller's website. Contact your county tax appraiser for complete details on these and other Texas exemptions, including any required forms you need to complete and the deadline for filing them. Contact information for your county appraiser is available from the Texas Comptroller.
Depending on the complexity of your situation, you might also want to seek legal help.
]]>Fortunately, there might be ways to lower your property tax burden, including:
If you qualify, you can seek tax relief using both these methods.
You might know that the North Carolina authorities compute your property tax by multiplying your home’s taxable value by the applicable tax rate.
Consider this example. Dennis and Margaret own a home in North Carolina. The assessor has placed a taxable value of $200,000 on it. If the property tax rate is 1% in their county (it's ordinarily slightly less), Dennis and Margaret will owe $2,000 in property tax. However, based on research into assessed property values in their area, they appeal the $200,000 figure. The appeals board reduces their assessed value to $150,000. Now, they owe only $1,500 in annual property tax on their North Carolina home.
Sometimes, a county assessor might wrongly believe that a home is larger than it is, or be unaware of damage (such as defective roofing or leaky pipes) that reduces its value. Or perhaps the assessor ignored the value of similar homes in the area in overvaluing yours.
If you believe that the tax assessor has misjudged the value of your property, or if the taxable value is higher than that of similar homes and properties, you might wish to pursue an appeal.
North Carolina allows for reduced property taxes if homeowners meet certain requirements. Below is a summary of the chief programs in North Carolina. See also North Carolina Gen. Stat § 105-277.
Homestead exclusion for elderly or disabled. If you are 65 years old or older, or you are permanently disabled, you are eligible for a partial exemption worth a minimum of $25,000, with annual adjustments for inflation. But you qualify only if your income is below a certain level.
Circuit breaker tax deferral for elderly and disabled. Some North Carolina homeowners are eligible for a property tax deferment program. It places a ceiling on how much tax the owners must pay. The tax amount above the ceiling is deferred until a disqualifying event occurs—typically when the home changes hands. To get this tax break, you must be 65 years old or older and permanently and totally disabled. In addition, you must have lived in the home for at least five years, and have income below a designated level.
Homestead exclusion for disabled veterans. A $45,000 exemption is available to a disabled veteran, or surviving spouse (who has not remarried). The veteran must first be certified as being totally and permanently disabled because of military service. If you take this exemption, you can’t receive any other property tax break.
Although North Carolina laws set statewide property tax rules, your local government handles the administration and levying of the tax. Contact your county tax assessor for complete details on how property tax exemptions apply in your county. Be sure to ask about any forms you need to complete, and the deadline for filing them. To find contact information for your county tax assessor, explore the North Carolina assessors list posted by the state's Department of Revenue.
In addition to the property tax that's based on the assessed value of your home, your tax bill might include special assessments. Typically these are made to pay for improvements, such as street paving or repaving, in your neighborhood.
Depending on the complexity of your situation, you might want to seek legal help to reduce your North Carolina property tax.
]]>But are these mortgages all that great? Reverse mortgages are complicated, risky, and expensive. And in many circumstances, the lender can foreclose. Getting a reverse mortgage usually isn't a good idea, even if you meet the minimum age requirement.
With a reverse mortgage, you take out a loan against the equity in your home. Unlike with a regular mortgage, the lender makes payments to you with a reverse mortgage.
The loan must be paid back when you die, move, transfer title, or sell the home. However, if you breach the terms of the loan contract, the lender might call the loan due earlier.
And if you don't pay off the loan once the lender accelerates it, you could potentially lose the property to a foreclosure.
The three main types of reverse mortgages are Home Equity Conversion Mortgages, proprietary reverse mortgages, and single-use reverse mortgages.
A Home Equity Conversion Mortgages (HECM), pronounced "heck-um," is the most popular type of reverse mortgage.
The Federal Housing Administration (FHA) insures HECMs. This insurance benefits the lender, not the homeowner. The insurance kicks in when the borrower defaults on the loan and the house isn't worth enough to pay back the lender in full through a foreclosure sale or another liquidation process. The FHA compensates the lender for the loss.
To get a HECM, you must meet strict requirements for approval, including a minimum age requirement. You can receive HECM payments in a lump sum (subject to some restrictions), as monthly payments, as a line of credit, or as a combination of monthly payments and a line of credit.
Proprietary reverse mortgages aren’t federally insured. This kind of reverse mortgage might be a "jumbo reverse mortgage" (only people with very high-value homes can get them) or another type of reverse mortgage, like one targeted at people age 55 and over.
Another kind of reverse mortgage is a "single-use" reverse mortgage, which is also called a "deferred payment loan." This kind of reverse mortgage is a need-based loan for a special purpose, like paying property taxes or paying for home repairs.
This article focuses on HECMs.
Again, the minimum age requirement for a HECM reverse mortgage is 62. There is no upper age limit to get a HECM reverse mortgage.
Reverse mortgages don't have credit or income requirements. The amount you can borrow is based on your home's value, current interest rates, and your age. Also, how much of your home's value you can draw out is limited. As of 2022, the most money available with a HECM is $970,800. Also, a borrower may get only 60% of the loan at closing or in the first year, subject to a few exceptions.
Other HECM eligibility requirements include the following:
Yes, when both spouses own the home, both need to be 62 to qualify for a HECM. However, a spouse younger than 62 can be listed on a HECM as an eligible nonborrowing spouse.
In the past, people used to get around the HECM minimum age requirement by deeding the property’s title to the older spouse. Then, they left the younger spouse off the reverse mortgage.
But this tactic caused problems because once the borrower died, the surviving spouse (who wasn’t named on the loan) was often told they had to repay the loan immediately, or else the lender would foreclose.
In 2013, a federal court ruled that the HUD regulation that allows lenders to demand that surviving spouses immediately repay reverse mortgage loans upon the death of their spouses violates federal law. Under revised HUD guidelines:
(Learn more in Nolo’s article Reverse Mortgages: Foreclosure Protections for Nonborrowing Spouses.)
If you're thinking about taking out a reverse mortgage with a nonborrowing spouse, be very careful and be sure to talk to a lawyer or HUD-approved housing counselor to learn how to protect the nonborrowing spouse in this situation adequately.
The average lifespan in the U.S. is almost 80 years. Reverse mortgages provide a finite number of payments. You could run out of money if you take out a reverse mortgage at the minimum age.
If you use up the equity in your home early on, you might not have enough money (or equity to borrow against) to cover your later expenses. You might find yourself in a position where you can’t afford your health care costs, you won’t be able to leave money to your heirs, or pay the taxes, insurance, and upkeep for the property.
Also, to get a reverse mortgage, you’ll typically first have to pay off any existing mortgage with the reverse mortgage funds. Other downsides include:
Reverse mortgages have significant downsides, like being risky, complicated, and expensive. If you need access to cash, a few other options for you to consider as an alternative to taking out a reverse mortgage include the following.
You might consider taking out a home equity loan or line of credit. However, you’ll have to meet credit and income requirements to qualify and make payments to repay the loan.
If you currently have a mortgage on your home, you could refinance it to lower the payments. Again, you’ll have to meet credit and income requirements and make monthly payments.
Also, taking out a new 30-year mortgage when you’re close to retirement might cause issues in the future when you have higher health care costs. Consider getting a mortgage with a shorter term, like a 10- or 15-year mortgage.
You could apply for a loan modification if you have an existing mortgage. A modification generally lowers the monthly payments by reducing the interest rate or extending the term.
Selling your home and moving to a more affordable place could be the best way to lower your overall expenses.
You could apply for federal, state, or local programs that provide financial assistance (to pay property taxes or make home repairs, for example) to seniors.
State and local programs often help older homeowners pay for utilities, make fuel payments, and complete home repairs. Many counties and local tax offices have programs to help pay property taxes. To get information about benefit programs in your area, go to benefitscheckup.org.
Again, reverse mortgages are complicated. You should proceed cautiously if you're considering taking out this kind of loan. To get details about the pros and cons of taking out a reverse mortgage, visit the AARP website, the Consumer Financial Protection Bureau (CFPB) website, and Federal Trade Commission (FTC) website.
To talk to a counselor from an independent government-approved housing counseling agency, go to HUD's website, where you'll find a list of counselors. Or call HUD at 800-569-4287 to learn more about how HECMs work. These counselors can also provide information about proprietary reverse mortgages and single-use reverse mortgages.
While federal law requires that borrowers talk to a loan counselor before taking out a HECM, not all counselors effectively explain the legal intricacies concerning reverse mortgages. Even after a long counseling session, many borrowers still don't fully understand all the reverse mortgage terms and requirements.
Because reverse mortgages are very complex and have serious consequences, consider also talking to an elder law or consumer protection attorney, or financial advisor. If you're concerned about a reverse mortgage foreclosure, speak to a foreclosure lawyer in your state.
]]>A home equity loan is a lump sum loan that uses your house as collateral, just like your primary mortgage. With a home equity loan, you borrow against the value of your home decreased by the existing mortgage (the equity).
How much can you borrow? Most lenders won't allow you to borrow more than 75% to 80% of the home's total value, after factoring in your primary mortgage. However, even if you put no money down when you bought your house and haven't paid a dime of principal back, any increased market value of your home may make a home equity loan feasible. For example, say you bought your house 12 years ago for $150,000 and it's now worth $225,000. Even if you haven't paid off any principal, you might qualify for a home equity loan of $30,000 -- this would bring your total loan amount to $180,000, which is 80% of your home's value of $225,000.
Interest rates on home equity loans. A home equity loan is sometimes called a "second mortgage" because if you default and your house goes into foreclosure, the lender is second in line to be paid from the proceeds of the sale of your house, after the primary mortgage holder. Because the risk of not getting paid the full value of the loan is slightly higher for the second lender, interest rates on home equity loans are usually higher than those on primary mortgages. But at least the interest is lower than on the typical credit card.
Loan term. The loan term of a home equity loan is usually much shorter than that on a primary mortgage -- ten to 15 years is common. That means that your monthly payments will be proportionally higher, but you'll pay less interest overall.
The other major option in home equity borrowing is a home equity line of credit, or HELOC. A HELOC is a form of revolving credit, kind of like a credit card -- you get an account with a certain maximum and, over a certain amount of time (called a "draw period"), you can draw on that maximum as you need cash.
The draw period is usually five to ten years, during which you pay interest only on the money you borrow. At the end of the draw period, you'll begin paying back the loan principal. Your repayment period will usually be in the ten- to 20-year range, which means that, as with a home equity loan, you'll pay less interest than you would on a traditional 30-year fixed mortgage, but your monthly payments will be proportionally higher. HELOCs sometimes have annual maintenance fees, which generally range between $15 to $75, and many have cancellation fees that can be several hundred dollars.
Similar to home equity loans, the amount of money you can borrow with a HELOC is based on the amount of equity you have. Usually that means you will be able to borrow some percentage of the home's value, reduced by the existing mortgage -- usually 75% to 80%. Unlike home equity loans, the interest rate on a HELOC is usually variable, so it can start low but climb much higher. HELOC interest rates are usually tied to the prime rate, reported in The Wall Street Journal, and the maximum rates are often very high -- similar to the rates on a credit card.
You can do whatever you want with a home equity loan or HELOC: finance your son's education, take an extravagant trip, or buy a big screen television. Some people use it to consolidate debts that they've racked up on various credit cards.
However, the most prudent way to spend the cash is on improving your home. If you aren't able to pay the loan back, you risk foreclosure, but if you used the cash to improve your home, you should see an increase in its value (if you followed the advice in Nolo's article Do Home Improvements Really Add Value?). This gives you the option to refinance if you need to and, if the value of your home has gone up, you'll be more likely to qualify for the loan. Moreover, you may be able to deduct home equity loan or HELOC interest if the loan money is spent on the home, but not for other purposes (see below).
HELOCs work well if you are making improvements on your home and have ongoing expenses. Often borrowers get them as an added safety net, in case they need cash suddenly, but without real plans to draw on them otherwise.
You may just want to have this source of cash in your back pocket for emergencies -- but make sure there's no requirement that you draw some amount, as some lenders require this so that they're assured of making a little money on the deal.
A final benefit to using a home equity loan or HELOC to improve (or even purchase) your home is that the interest can be tax deductible, just as it is on a primary mortgage. However, the Tax Cuts and Jobs Act (TCJA), the massive tax reform law that went into effect in 2018, placed new restrictions on this deduction.
Before 2018, you could deduct the interest on up to $100,000 in home equity loans or HELOCs. You could use the money for any purpose and still get the deduction—for example, homeowners could deduct the interest on home equity loans used to pay off their credit cards or help pay for their children’s college education. The TCJA eliminated this special $100,000 home equity loan deduction for 2018 through 2025.
However, the interest you pay on a home equity loan or HELOC used to purchase, build, or improve your main or second home remains deductible. The loan must be secured by your main home or second home. Thus, for example, you can deduct the interest on a home equity loan you use to add a room to your home or make other improvements.
Such a home equity loan or HELOC counts towards the annual limit on the home mortgage interest deduction. If you purchased your home before Dec. 15, 2017, you may deduct mortgage interest payments on up to $1 million in total loans used to buy, build, or improve a main home and a second home. If you purchased your home after December 15, 2017, you may deduct the interest on only $750,000 of home acquisition debt. The $750,000 loan limit is scheduled to end in 2025. After then, the $1 million limit will return. These numbers are for both single taxpayers and married taxpayers filing jointly. The maximums are halved for married taxpayers filing separately.
Also, you may deduct mortgage interest of any type only if you itemize your personal deductions on IRS Schedule A. You should itemize only if all your personal deductions, including mortgage interest, exceed the standard deduction. The TCJA roughly doubled the standard deduction. As a result, only about 14% of all taxpayers are able to itemize, down from 31% in past years. If you're one of the 86% who don't itemize, the home equity loan and HELOC interest deduction won't benefit you.
Shopping for a home equity loan or HELOC is just like shopping for a primary mortgage. You can either go to a mortgage broker or you can research loan options on your own. See Getting a Mortgage for more information on shopping for a mortgage.
With a home equity loan, expect to pay some of the typical fees you paid on a regular mortgage, but in much lesser amounts. (Some of these fees are based on the loan amount, which is probably lower than your primary mortgage.) At the very least, you'll have to pay for an appraisal, which is the lender's opportunity to evaluate how much your home is worth. You may find a home equity loan without any fees, but be careful: Usually it means these costs are rolled into the loan, perhaps in the form of a higher interest rate. Costs on HELOCs are usually (but variable interest rates mean the interest payments can be much higher).
To learn more about home buying, read Nolo's Essential Guide to Buying Your First Home, by Ilona Bray, Alayna Schroeder, and Marcia Stewart (Nolo).
]]>How can you reduce your California property tax burden? There are two main methods (per laws known as Proposition 13, Proposition 58, and Proposition 19). The first is available to all homeowners. The second depends on whether you meet certain qualifications. If you meet those qualifications, you can seek tax relief using both methods.
California has 58 counties, and some variation in policies and procedures for calculating and assessing property taxes. County authorities (known as "assessors") compute a homeowner's property tax by multiplying the home’s taxable value by the applicable tax rate.
The taxable value is normally set based on the purchase price (the "base-year value"), but county authorities have the power to raise it by up to 2% each year in keeping with inflation, and to reassess a property's value under certain circumstances.
For example, when a homeowner has made significant improvements (for instance, installed a swimming pool, renovated the bathrooms, and so on), the assessor will receive a copy of the building permits, and may reassess at that time. The assessor can also set a separate base-year value on newly constructed portions of the home.
But mistakes can be made in these sorts of reassessments. It's even possible for the home's value to drop below its assessed value or purchase price, either because of conditions in the real estate market or a natural disaster. (If your neighborhood is struck with a hurricane, for example, home values would fall.)
One of the primary ways that you can reduce your overall tax burden, therefore, is by reducing the assessed value of your home—in other words, filing an appeal arguing that its assessed value is actually less than what the assessor assigned it.
The California Board of Equalization offers a helpful guide to the appeals process. You might, for example, argue that the home is in worse condition than the county assessor thought, or that the improvements were less extensive than the assessor's information showed.
Unlike in other states, however, arguing that a California home has been assessed at a higher value than other, similar homes in the area is likely to be a non-starter, owing to the wide variations in base purchase price.
Pursuing an appeal is time-consuming, but can be financially rewarding if successful. Consider this example. Bonnie and Clyde live in San Francisco County. The San Francisco County Assessor placed a taxable value of $900,000 on their home. If the tax rate is 1%, they will owe $9,000 in property tax. If Bonnie and Clyde successfully appeal, and the county appeals board reduces that value to $850,000, the savings will be significant. Now, Bonnie and Clyde would owe only $8,500 in property tax—savings that will compound over the years.
If you believe that the tax assessor has misjudged the value of your home, you might wish to contact your county assessor and pursue an appeal.
Another note on California's administrative structure: While the local county assessors offices control much of local tax policy implementation, these offices are overseen by the statewide agency known as the State Board of Equalization (BOE). The BOE acts in an oversight role to ensure compliance by county assessors with property tax laws and regulations. If you have questions or concerns that your local county assessor cannot answer, you might wish to contact the BOE's Property Tax Department.
Beyond reducing the taxable value of your home, California allows for exemptions from property taxes if you meet certain requirements. Unlike most states, which have exemptions governed by statutes or local rules, California's exemptions are articulated in the State Constitution (Article XIII). California also offers various forms of property tax assistance to certain homeowners.
The chief programs in California, which are implemented by county assessors' offices based on one's individual situation, are summarized here:
The BOE publishes a helpful online guide that explains these exemptions in greater detail. For further information about how you might be able to apply them to your situation, and any required forms you need to complete and the deadline for filing those forms, contact your local tax assessor. (See the BOE's county assessor directory.)
Finally, depending on the complexity of your situation, you might wish to seek legal help. To find an experienced real estate lawyer in California, check out Nolo’s Lawyer Directory.
]]>A HELOC can be a good option for people looking to leverage their home to get some extra cash and who have enough income to make payments. For example, a HELOC can be a sound choice if you need additional money for something like home repairs or a major medical bill and can afford monthly payments.
The upsides to HELOCs include the following.
But HELOCs have downsides, too.
Before getting a reverse mortgage, you should understand how they work and learn the significant risks associated with them. You also need to watch out for reverse mortgage scams.
The most common type of reverse mortgage is called a "Home Equity Conversion Mortgage" (HECM), which is FHA-insured. This insurance protects the lender, not the borrower. You must be at least 62 years old to qualify for a HECM.
With a HECM, the payments are distributed as a lump sum, monthly amounts, or a line of credit (or a combination of monthly payments and a line of credit). The amount you can get is based on the equity in your home. Because you receive payments from the lender, your equity decreases over time as the loan balance increases.
In addition to not having to make any monthly payments, HECMs are nonrecourse. So, the lender can’t come after you (or your estate) for a deficiency judgment after a foreclosure.
Mortgage brokers and lenders often make it sound like reverse mortgages have no downsides. But this type of loan isn't right for everybody. Reverse mortgages are complicated and risky. For most people, taking out a reverse mortgage is a bad idea.
A few of the substantial issues and risks involved with reverse mortgages include:
Reverse mortgages are structured so that the lender will most likely end up getting the home, either through foreclosure or a deed in lieu. Even if you comply with all of the mortgage terms, you probably won’t have money or equity left when the loan comes due, and you’ll likely have to give up the home.
Older homeowners are often coerced into taking out reverse mortgages without realizing that other options are available. The Consumer Protection Financial Bureau (CFPB) advises consumers who are considering taking out a reverse mortgage to consider all other alternatives, including:
If you're considering a reverse mortgage, it's highly recommended that you proceed cautiously and ensure you understand all the risks and conditions involved with this kind of loan. For more information on reverse mortgages and the risks related thereto, visit AARP’s reverse mortgage webpage. You can also go to the Federal Trade Commission’s website on reverse mortgages.
To learn more about HECMs (reverse mortgages insured by the U.S. Government through the Federal Housing Administration), go to www.hud.gov and enter "Home Equity Conversion Mortgage" in the search box to find a list of relevant links.
An attorney, like a consumer protection attorney, can also help you go over the pros and cons of getting a reverse mortgage. If you already have a reverse mortgage and are facing a foreclosure, consider contacting a foreclosure attorney immediately to discuss your options.
]]>The three basic types of reverse mortgages are:
When you take out a reverse mortgage, the title to your home remains with you, and you continue to live in the home. You must continue to pay for repairs, property insurance, and taxes. When you move out, sell the home, or die (or the last surviving borrower dies), you or your estate must repay the loan.
The loan balance will include the amount paid to you in cash, plus the interest and fees added to the loan balance each month. So, your total debt increases as the loan funds are paid to you and interest on the loan accrues.
Usually, when the loan become due, you or your heirs will have to sell the home and use the proceeds to pay it off. You or your heirs can keep any money left over. If you or your heirs want to retain ownership of the home, you usually must repay the loan in full—even if the loan balance is greater than the home's value.
As far as taxes go, reverse mortgages have pros and cons.
On the plus side, reverse mortgages are considered loan advances to you, not income you earned. So, the payments you receive aren't taxable. Moreover, they usually don’t affect your Social Security or Medicare benefits.
On the downside, all the interest that accrues on your reverse mortgage is not deductible by you until you actually pay it, which is usually when you pay off the loan in full. Moreover, your mortgage interest deduction is usually subject to the same limits as other home equity loans—that is, you can deduct the interest on no more than a loan of $100,000.
A reverse mortgage might or might not be your best option. Here are some factors to keep in mind:
Do your homework before taking out a reverse mortgage. For more information about reverse mortgages, visit the website of the Consumer Financial Protection Bureau (search for "reverse mortgage") and AARP's useful articles on reverse mortgages.
]]>HECMs are the most popular type of reverse mortgage. Reverse mortgage lenders don't consider your credit scores when making the loan. They're based on your home equity and other factors, so they're relatively easy to get.
But once you learn more about reverse mortgages, including their downsides, you might want to reconsider getting one.
The U.S. government insures HECMs through the Federal Housing Administration (FHA). This insurance mostly protects the lender, not the borrower. It comes into play if the loan is accelerated (called due) and the house isn't worth enough to pay back the lender in full through a foreclosure sale or another type of liquidation process, like a deed in lieu of foreclosure. In those cases, the FHA will compensate the lender for the loss.
Also, if you have a HECM and lose the home to foreclosure, you won't have to pay a deficiency judgment. The insurance covers the loss.
HECMs are generally available to borrowers at least 62 years of age, occupy the property as a principal residence, and own the home outright or have significant equity in the home, subject to some restrictions and requirements.
The following types of properties are eligible for a HECM:
Other eligibility requirements include the following:
You'll also have to comply with some requirements, like paying mortgage insurance premiums, maintaining the property, and having a set-aside account if you likely can't stay current on items like property taxes and homeowners' insurance bills in the future.
Reverse mortgages have significant downsides:
If you're considering a reverse mortgage, it's highly recommended that you proceed cautiously and ensure you understand all the risks and conditions involved with such a loan. For more information on reverse mortgages and the risks related thereto, visit AARP’s reverse mortgage webpage. You can also go to the Federal Trade Commission’s website on reverse mortgages or the Consumer Financial Protection Bureau’s website to get more information.
An attorney can also help you review the pros and cons of a reverse mortgage. Even though you'll have to complete a counseling session with a HUD-approved counselor to get a HECM, it's also wise to talk to a financial planner, an estate planning attorney, or a consumer protection lawyer before taking out this kind of loan.
]]>I just received a notice that I have a new mortgage servicer. Why did a transfer happen? Did I do something wrong? Also, I sent my recent payment to the old servicer. What should I do?
If you find out that your loan servicer is changing, don't take it personally. Servicing transfers frequently happen in the mortgage business. Your loan was likely one of thousands in a transfer bundle that was based on a business decision, not on your value as a customer.
Also, you probably don't need to worry that you sent your recent payment to the old servicer. After a servicing transfer, you get a limited amount of time during which you may send your mortgage payments to the old servicer rather than the new servicer, even though the new servicer is the proper recipient. The old servicer then has to forward the payment to the new servicer or send it back to you.
After you take out a mortgage loan, the lender might sell the loan or the right to service the loan (separate from ownership of the loan) to a different party, which will then service the loan. The new servicer might then hire a vendor, called a "subservicer," to take on the servicing duties, rather than servicing the loan itself.
If a servicing transfer happens, you’ll get one or, possibly, two notices. These notices will let you know that the servicer has changed and that you must send your payments to the new servicer. The reason for the notices is to give you sufficient warning before you need to start sending the payments to a new servicer instead of the old one.
In most cases, the transferring servicer must provide you with a notice not less than 15 days before the effective date of the transfer. The new servicer must provide you with a notice of transfer not more than 15 days after the effective date of the transfer. But the notices from the old servicer and the new servicer may be combined into a single notice, in which case the notice must be provided to you not less than 15 days before the effective date of the transfer. (12 C.F.R. § 1024.33). These letters are usually called "hello/goodbye" letters in the mortgage industry.
The notice(s) of servicing transfer must, by law, contain the following information:
Under federal law, you can still send your mortgage payments to the old servicer, rather than the new servicer, for 60 days starting on the servicing transfer date. If you send your payment to the old servicer during this time, the new servicer can't assess a late fee and can't report your payment as late to the credit reporting bureaus—so long as the old servicer gets the payment on or before the payment due date, including any grace period. (12 C.F.R. § 1024.33).
The old servicer is then supposed to send the payment on to the new servicer or return the payment to you. Sometimes though, a payment sent to the old servicer might get lost in the transfer and, as a result, the new servicer might not credit the payment to your account. If the payment you sent to the old servicer isn't credited to your account, call your new servicer.
If you can’t clear up the problem, send a notice of error to both the new servicer and the old servicer along with copies of any relevant supporting documents. Under federal law, both the new servicer and old servicer (so long as the servicing transfer occurred less than a year ago) must then investigate and respond to your notice of error. If the servicer doesn’t respond to your notice of error, you can file a complaint with the Consumer Financial Protection Bureau or get an attorney to help you resolve the matter.
In the meantime, continue making your regular payments to the new servicer while the issue is pending. Otherwise, you could risk going into default and face a possible foreclosure. After you start sending your mortgage payments to the new servicer, you should monitor at least two payments to make sure the new servicer is correctly applying them to your mortgage loan account.
]]>For tax purposes, a home improvement includes any work that:
Examples of home improvements include:
Can you deduct home improvements? If you use your home purely as your personal residence, the answer is "no." You can't deduct the cost of home improvements. These costs are nondeductible personal expenses.
But home improvements do have a tax benefit. They can help reduce the amount of taxes you have to pay if and when you sell your home at a profit.
The cost of home improvements are added to the tax basis of your home. "Basis" means the amount of your investment in your home for tax purposes. The greater your basis, the less profit you'll get when you sell your home.
Home improvements are the most common way homeowners increase their basis.
But your home's basis doesn't include the cost of improvements that were later removed from the home. For example, if you installed a new chain-link fence 15 years ago and then replaced it with a redwood fence, the cost of the old fence is no longer part of your home's basis.
Although you can't deduct home improvements, it's possible in some situations to depreciate them. "Depreciation" means that you deduct the cost over several years—anywhere from three to 27.5 years.
To qualify to depreciate home improvement costs, you must use a portion of your home other than as a personal residence.
One way you can depreciate home improvement costs is to have a business and use a portion of the home as an office for the business. To qualify for the home office deduction you must have a legitimate business and use part of your home exclusively and regularly for the business.
If you qualify for this deduction, you can deduct 100% of the cost of improvements you make just to your home office. For example, if you use a bedroom in your home as a home office and pay a carpenter to install built-in bookshelves, you may depreciate the entire cost as a business expense.
Improvements that benefit your entire home are depreciable according to the percentage of home office use. For example, if you use 20% of your home as an office, you may depreciate 20% of the cost to upgrade your home heating and air conditioning system.
Another way to depreciate home improvement costs is to rent out a portion of your home. This enables you to depreciate the expense as a rental expense. This amount is deducted from the rental income you receive.
As with the home office deduction, improvements that benefit only the portion of the home being rented can be depreciated in full. Improvements that benefit the entire home can be depreciated according to the percentage of rental use of the home.
Repairs are things you do to your home that don't substantially add to its value, increase its useful life, or adapt it to new uses. For example, adding a new roof to your home is an improvement. But replacing a few loose shingles on your roof is a repair.
Repairs to your personal residence aren't tax deductible and they don't increase the basis in your home. In other words, they have no tax impact.
But, if you have a tax deductible home office, repairs are deductible. Likewise if you rent out all or part of your home. Repairs just to your home office or a room you rent full-time are 100% deductible. The cost of repairs that benefit your entire home—roof repairs, for example—must be allocated according to to the percentage of rental use of the home. For example, if you use 20% of your home as a home office and spend $1,000 to repair the roof, you can deduct $200.
If you have questions about whether you can write off home improvements or repairs, contact a tax lawyer.
]]>Opening a tax bill can cause shock to many homeowners. But by learning how property taxes are computed in Texas, you can investigate whether the assessed value of your home is too high, and the basis of an excessive property tax bill.
This article describes the tax assessment process in Texas. It will help you determine whether the taxable value of your home is higher than it should be. If so, there are measures you can take to have that value reduced in order to knock some dollars off your property tax bill.
Texas does not have any state property taxes. Rather, taxes are determined at the county level, depending on the location of your home. Two factors determine your Texas tax bill:
Below is an overview of these factors.
The process starts when a local public official—known as the county tax appraiser—determines your home’s taxable value. In Texas, the taxable value of a residential property is 100% of its “market value”—basically, what it would sell for on the open market. The 100% figure is also known as the assessment ratio.
The taxing authorities multiply the taxable value of your property by the tax rate to arrive at the tax you’ll owe. Imagine that the taxable value of your property is $300,000 and the tax rate is $10 for every $1,000 of taxable value. Your property tax for the year will be $3,000 (300 x $10 = $3,000).
Local officials set the tax rate, so it varies depending on where you live. There are 254 counties in Texas, each with its own tax rate. You can view each of those counties, and find information about local assessment policies online. If you're unhappy about the tax rate, there's not much you can do other than vote wisely for the elected officials who determine it, and carefully consider revenue issues that appear on the ballot.
But the story is different for the taxable-value factor. If the taxable value assigned to your home is too high, you might be able to get it lowered—and save a bundle in property tax.
Consider this example: George and Loren own a home in Texas. The county tax appraiser has placed a taxable value of $400,000 on the property. The local tax rate is $10 for every $1,000 of taxable value. This means that their annual property tax is $4,000. George and Loren do some research and conclude that, based on recent sales of comparable homes, the taxable value of their home should be $350,000. They successfully appeal their assessment, thus lowering their tax bill to $3,500 a year. That $500 reduction could add up to $5,000 in savings over a ten-year period.
Get contact information for your county tax appraiser from the Texas Comptroller of Public Accounts.
The tax record for your home might contain inaccurate or incomplete information, leading the county tax appraiser to place too high a value on it. As explained above, the higher your home is valued, the more county tax you will pay.
Get a copy of the tax record from your county tax appraiser's office. Review the record for errors. Among other things, check the following:
If there is incorrect or incomplete information, let the tax appraiser know so that the record can be corrected and the taxable value adjusted. But even if the tax record is accurate, you might disagree with the tax appraiser’s conclusion regarding the market value of your home. In that case, you’ll need to do more.
Two types of information can help you establish that the tax appraiser has placed too high a taxable value on your home. The first (and most important) is how the appraiser has treated homes similar to yours within your Texas county and neighborhood. The second is how much homes like yours are currently selling for.
Review your county tax assessor's records for homes in your community that resemble your own. The time and effort can be worth it if you believe that your home is truly over-valued. Focus on homes that have approximately the same square footage as yours and are located in the same neighborhood or a nearby one. If similar homes have a taxable value lower than yours, this is strong evidence that you’re over-assessed.
Consider this example: George and Loren own a three-bedroom ranch-style home in a subdivision with many homes like theirs. The taxable value of their home is $375,000. They check the records for a dozen similar homes in their subdivision and discover that the average taxable value of those homes is $340,000. What’s more, most of the other homes have finished basements, while George and Loren's doesn’t. The two have good evidence for claiming that the taxable value of their property is too high.
If you bought your house recently, the price you paid is excellent evidence of its current value. Regardless of when you bought your home, however, you should gather information about recent sales prices of similar homes in your community. For advice on gathering this kind of evidence, see Listing Your House: What List Price Should You Set?
Try to avoid gathering data from transactions in which the buyer has purchased a home from a relative, or at a foreclosure or property tax sale. The sales prices in such transactions may be artificially low and won’t be convincing evidence of true market value.
You might also consider asking an experienced real estate broker to give you information about recent home sales in your area, based on data from the Multiple Listing Service. You might need to pay a modest fee for such assistance.
If the stakes are high, you can hire a private appraiser to visit your home and provide a written evaluation, though this will be more expensive. A local lender or real estate broker might be able to recommend a qualified appraiser. If not, explore the Appraisal Institute website.
If you recently refinanced your home or took out a home equity loan, the lender probably ordered a professional appraisal. Obtain a copy of it. It may give you powerful ammunition in your quest for a reduced taxable value.
To learn more about the property tax system in Texas, see Property Tax System Basics, on the website of the Texas Comptroller.
]]>But by learning how property taxes are computed in Pennsylvania, you can investigate whether the assessed value of your home is too high and the basis of an excessive property tax bill. This article will help you determine whether you can or should take measures to have your property's value reduced. You might be able to knock some dollars off your property tax bill.
In Pennsylvania, the amount you'll owe and the date when payment is due varies depending on the county where you live. Some counties allow you to make installment payments.
The amount of your Pennsylvania property taxes are determined by a combination of the following:
In addition, you might qualify for some sort of exemption (tax break), such as a "homestead exemption" or one based on disability for low-income veterans.
The property taxing process begins when the county tax assessor determines your home’s taxable value. In Pennsylvania, the taxable value of a home is a percentage of its “actual value”—basically, what the home would sell for on the open market.
Not surprisingly, major cities such as Philadelphia tend to have higher property taxes than rural counties. You cannot do much about the tax rate except to vote wisely for the elected officials who determine it, and carefully consider revenue issues that appear on the ballot.
When it comes to the taxable-value factor, however, you have more leverage. If the taxable value assigned to your home is too high, you might be able to get it reduced. A mere $500 reduction in your annual tax bill would add up to $5,000 in savings over a ten-year period.
Consider this example: Larry and Joan own a home in Pennsylvania. The county tax assessor has placed a taxable value of $400,000 on the property. The local tax rate is $10 for every $1,000 of taxable value. This means that their annual property tax is $4,000. After researching recent sales of comparable homes, Larry and Joan d conclude that the taxable value of their home should be $350,000. They successfully appeal their assessment. Now, their tax bill is $3,500 a year instead of $4,000.
Contact information for your county tax assessor is available by calling your county government office or checking online. (Search for "[name of county] property assessor or assessment office" or navigate via this list of the 67 Pennsylvania counties.)
The tax record for your home might contain inaccurate or incomplete information, which would then lead the county tax assessor to place too high a value on it. You can obtain a copy of your property tax records from your county's tax assessor’s office. Review it for errors and check the following:
If you spot incorrect or incomplete information, let the tax assessor know. That way, the record can be corrected and the taxable value adjusted. But even if the tax record is accurate, you might disagree with the tax assessor’s conclusion regarding the market value of your home. In that case, you will need to do more.
Two types of information can help establish that a Pennsylvania county tax assessor has placed too high a taxable value on your home. The first (and most important) is how the assessor has treated homes similar to yours. The second is how much homes like yours are currently selling for within the geographic area.
Review the assessment records for homes in your community that resemble yours. Contact the tax assessor’s office to find out how you can access these records. Finding comparable homes will take time and effort, but can be worth it if you believe that your home is truly over-valued. Look for homes that have approximately the same square footage as yours and are located in the same neighborhood or a nearby one. If similar homes have a taxable value lower than yours, this is strong evidence that you’re over-assessed.
Consider this example: Derek and Liza own a three-bedroom ranch-style home in a subdivision with many homes like theirs. The taxable value of their home has been set at $375,000, which they suspect is too high. They check the records for a dozen similar homes in their subdivision and discover that the average taxable value of those homes is $340,000. What’s more, most of the other homes have finished basements, while Derek and Liza's doesn’t. Derek and Liza have good evidence for claiming that the taxable value of their home is higher than it should be.
If you bought your house recently, the price you paid is excellent evidence of its current value. Regardless of when you made the purchase, you should gather information about recent sales prices of similar homes in your community.
For guidance, read Listing Your House: What List Price Should You Set? Online resources such as Zillow can also be useful, though anything but definitive, since the data is based on limited public data run through an algorithm.
Try not to rely on transactions in which the buyer purchased a home from a relative, or at a foreclosure or property tax sale. The sales prices in such transactions might be artificially low and won’t be convincing evidence of true market value.
Also consider asking an experienced real estate broker to give you information about recent home sales in your area, derived from the Multiple Listing Service database. You might need to pay a modest fee for such assistance.
If the stakes are high, you can hire a real estate appraiser to visit the house and provide a written report, though this will be more expensive. A local lender or real estate broker may be able to recommend a qualified appraiser. If not, visit the Appraisal Institute.
Importantly, if you recently refinanced your home or took out a home equity loan, the lender probably ordered a professional appraisal. Obtain a copy of it. It might give you powerful ammunition in your quest for a reduced taxable value. Then follow the instructions from your assessor's office for filing an appeal.
]]>Opening your tax bill can be a cause for shock, if not outrage. But by learning how property taxes are computed in Michigan, you can investigate whether the assessed value of your home is too high, and thus is the basis of an excessive property tax bill.
This article describes the tax assessment process in Michigan and measures you can take to have that value reduced.
According to Michigan's General Property Tax Act, two factors determine your tax bill: the taxable value of your home (assessed annually), and the applicable tax rate (that is, the percentage of the taxable value that the local tax authorities use to compute your property tax). Below is an overview of these factors.
The process begins when a local public official, known as the local tax assessor, determines your home’s taxable value. In Michigan, the taxable value of a home is up to 50% of its “true cash value” (basically, what the home would sell for on the open market). The 50% figure is also known as the assessment ratio.
The taxing authorities multiply the taxable value of your home by the tax rate to arrive at the tax you’ll owe. For example, imagine that the taxable value of your home is $300,000 and the tax rate is $10 for every $1,000 of taxable value. Your property tax for the year will be $3,000 (300 x $10 = $3,000).
Local officials set the tax rate, so it varies depending on where you live. You cannot do much about the tax rate except to vote wisely for the elected officials who determine the tax rate, and carefully consider revenue issues that appear on the ballot.
But the story is different for the taxable-value factor. Here, you have more leverage. If the taxable value assigned to your home is too high, you might be able to get it reduced, and save a bundle in property tax. A $500 reduction in your annual tax bill would add up to $5,000 in savings over a ten-year period. Not bad!
You can get contact information for your local tax assessor by calling your city, township, or village office, or by visiting the website of Michigan's Department of Treasury.
The law does contain some exemptions that might help reduce your tax bill, such as for:
Most of the other exemptions have to do with non-residential uses of a property.
The tax assessment of your home is not a secret; it is a public document that you can review, by getting a copy from the tax assessor’s office (most likely online). Look for any inaccurate or incomplete information that leads the local tax assessor to place too high a value on the property.
Among other things, check the following:
Michigan also offers an easy-to-use property tax estimator on its website.
If there’s wrong or incomplete information, let the tax assessor know, so that the record can be corrected and the taxable value adjusted. But even if the tax record is accurate, you might disagree with the tax assessor’s conclusion regarding the market value of your home. In that case, you will need to do more.
Two types of information can help you establish that the tax assessor has placed too high a taxable value on your home. The first (and most important) is how the assessor has treated homes similar to yours. The second is how much homes like yours are currently selling for.
Review the assessment records for homes in your community that resemble your own. (These are available through the tax assessor’s office.) Finding comparable homes will take time and effort, but can be worth it if you believe that your home is truly over-valued.
Try to find homes that have approximately the same square footage as yours and are located in the same neighborhood or a nearby one. If your home has amenities such as a pool, try to compare other homes with similar such amenities. If similar homes have a taxable value lower than yours, this is strong evidence that your home is over-assessed.
Consider this example: Todd and Liz own a three-bedroom ranch-style home in a subdivision that has many homes quite similar to theirs. The taxable value of their home is $375,000. They check the records for a dozen similar homes in their subdivision and discover that the average taxable value of those homes is $340,000. What’s more, most of the other homes have finished basements, while and Todd and Liz's doesn’t. Todd and Liz have good evidence for claiming that the taxable value of their home is too high.
If you bought your house recently, the price you paid is excellent evidence of its current value. Regardless of when you bought your home, you should gather information about recent sales prices of similar homes in your community. Online resources such as Zillow can also be useful, but be aware that the values generated there are by a computer; no one has actually visited the house.
Try to avoid relying on transactions in which the buyer has purchased a home from a relative, or at a foreclosure or property tax sale. The sales prices in such transactions might be artificially low and won’t be convincing evidence of true market value.
Also consider asking an experienced real estate broker to give you information about recent home sales in your area, drawing from the Multiple Listing Service database. You might need to pay a modest fee for such assistance. If the stakes are high, you can hire a private appraiser to gather the information and provide a written report, though this will be more expensive. The Appraisal Institute website lets you search for a professional appraiser by zip code.
Also, note that if you recently refinanced your home or took out a home equity loan, the lender probably ordered a professional appraisal. Obtain a copy of it. It might give you powerful ammunition in your quest for a reduced taxable value.
]]>Home improvements can be deductible as a medical expense if their main purpose is medical care for you, your spouse, or your dependents. These expenses are fully deductible subject to the limits discussed below if they don’t increase the value of your home. Examples of such fully deductible expenses are improvements to make your home wheelchair accessible or to make it easier for a disabled person to get around the home, including:
However, some improvements increase the value of your home—for example, installing an elevator so that a disabled person doesn't have to use stairs, or installing a new bathroom on the ground floor of your home to avoid having to use stairs. For these types of improvements, you must reduce the amount of your deduction by the increase in the value of your home.
It can even be possible to deduct the cost of adding a swimming pool to your home. However, the use of the pool must be prescribed by a doctor as medical treatment or physical therapy. Thus, for example, you can't deduct the cost of a pool because swimming is good exercise. Moreover, the IRS may question the deduction unless the pool is specially designed for medical treatment. For example, the IRS permitted a deduction by an osteoarthritis patient whose doctor prescribed swimming several times a day as treatment. He built a special indoor lap pool with specially designed stairs and a hydrotherapy device.
You can also deduct amounts you pay for the operation and upkeep of an improvement, as long as the main reason for them is medical care. This rule applies even if none or only part of the original cost of the capital asset qualified as a medical care expense.
However, there are two tax rules that work together to limit or eliminate entirely your medical expense deduction for home improvements:
First, you can deduct home improvements as medical expenses only if you itemize your personal deductions instead of taking the standard deduction. If you don’t itemize, you get no deduction for your medical expenses, including home improvements. Changes brought about by the Tax Cuts and Jobs Act that took effect in 2018 make it far more difficult for most taxpayers to itemize than in the past.
You should itemize only if all your deductible personal expenses exceed the standard deduction. The TCJA almost doubled the standard deduction to over $12,000 for single taxpayers and nearly $25,000 for married couples filing jointly (as almost all do). This means you have to have a lot of personal deductions to itemize. However, the TCJA limited or eliminated personal expenses that used to be deductible. Only the following personal expenses may be deducted by itemizers:
In the past, about 30% of all taxpayers itemized their personal deductions. As a result of the TCJA's changes, only about 10% of taxpayers are able to itemize today.
However, you could fall within the 10% who itemize if your deductible home improvement expenses are substantial and/or you have many other personal deductions such as charitable contributions and home mortgage interest.
The other major impediment to deducting home improvements as medical expenses is that you can’t deduct the full cost of such expenses, even if you itemize. You can deduct only the amount they and all your other deductible medical expenses exceed 7.5% of your adjusted gross income (AGI). Your AGI is your total taxable income, minus deductions for retirement contributions and one-half of your self-employment taxes (if any), plus a few other items (as shown at the bottom of your Form 1040).
Thus, for example, if your AGI is $100,000, you can deduct your home improvements and other medical expenses as an itemized deduction only to the extent they exceed $7,500. If you have $10,000 in total medical expenses, you can deduct only $2,500. You would add the $2,500 to your other deductible personal expenses and, if they total more than the standard deduction, you would deduct them as an itemized deduction. On the other hand, if you have a $100,000 AGI and your medical expenses are less than $7,500, you would not be able to deduct them at all.
Be sure to keep track of all the medical-related expenses you pay during the year in addition to home improvements because they could add up. Such expenses include out-of-pocket payments for prescription drugs, dental care, chiropractic care, eye exams and glasses or contacts, medical insurance, Medicare payments, deductibles, and co-pays. You can find an exhaustive list of deductible home expenses in IRS Publication 502, Medical and Dental Expenses.
Because of the AGI threshold on deducting home improvements as a medical expense, it’s advisable to bunch such expenses together into a single year. For example, if you want to install exit ramps and a stairway lift in your home, have all the work done in a single year. This will give you as large a deduction as possible for that year. You should follow this strategy for your other deductible personal expenses as well, such as charitable contributions.
]]>Opening your tax bill (sometimes known as an "assessment") can be a cause for shock, if not outrage. By learning how property taxes are computed in New Jersey, however, you can investigate whether the assessed value of your home is too high and the basis of an excessive property tax bill. In some situations, you might even be able to challenge the assessment and lower your bill.
This article gives an overview of the tax assessment process in New Jersey. It will help you determine whether the taxable value of your home is higher than it should be. If so, there are measures you can take to have that value reduced.
Note, however, that the process can be complicated, and depends a lot on your specific property and county. Thus, you might wish to use this article to spark further investigation, including having conversations with local tax professionals.
In New Jersey, two factors determine your tax bill: first, the taxable value of your home, and second, the applicable tax rate (that is, the percentage of the taxable value that the local tax authorities use to compute your property tax).
Let's examine how these two factors work together to determine your total bill.
The process starts when the municipal tax assessor determines your home’s taxable value. In New Jersey, the taxable value of a home is ordinarily 100% of its “true value," which is essentially what the home would sell for on the open market. Your county tax board can adjust this percentage figure, which is also known as the assessment ratio.
The taxing authorities multiply the taxable value of a home by the tax rate to arrive at the tax owed. Imagine that the taxable value of your home is $300,000 and the tax rate is $10 for every $1,000 of taxable value. Your property tax for the year will be $3,000 (300 x $10 = $3,000).
Local officials set the tax rate, so the rate varies depending on where you live (for instance, in Bergen County versus Somerset County). You unfortunately cannot do much about the tax rate, except to vote wisely for the elected officials who determine it and carefully consider revenue issues that appear on the ballot.
But you may have some influence on the taxable value of your home. If the taxable value assigned to it is too high, you might be able to get it reduced, and thus save a bundle in property tax. Even just a $500 reduction in your annual tax bill would add up to $5,000 in savings over a ten-year period. Not bad!
Consider this example: Matthew and Catherine own a home in New Jersey. The tax assessor has given it a taxable value of $400,000. The local tax rate is $10 for every $1,000 of taxable value. This makes their annual property tax $4,000. After some research, the couple concludes that, based on recent sales of comparable homes, the taxable value of their home should be $350,000. They successfully appeal their assessment to the local taxing authority. Now, their tax bill is $3,500 a year instead of $4,000.
In most New Jersey communities, you can get contact information for your tax assessor by phoning your municipal government office. Many municipalities post contact information online. Find yours at the official New Jersey State website. In Gloucester County, the County handles property tax assessments as part of a pilot program; call 856-307-6445.
You may wonder how, exactly, you can convince the tax assessor that your home is worth less than they think it is. The tax record for your home may contain inaccurate or incomplete information that leads the tax assessor to place too high a value on it. You can get a copy of the tax record at the tax assessor’s office. Or, your municipality might make your assessment record available online.
Review the tax record for errors. Be especially sure to check the following:
If there is wrong or incomplete information on the records, let the tax assessor know so that the record can be corrected and the taxable value adjusted. But even if the tax record is accurate, you might disagree with the tax assessor’s conclusion regarding the market value of your home. In that case, you will need to do more.
Two types of information can help you establish that the tax assessor has placed too high a taxable value on your home. The first (and most important) factor is how the assessor has treated homes similar to yours in the local area. The second is how much homes like yours are currently selling for, again focused on the local area.
Review the assessment records for homes in your community that resemble your own. You will find those records at the tax assessor’s office. Finding comparable homes will take time and effort, but can be worth it if you believe that your home is truly over-valued. Try to find homes that have approximately the same square footage as yours and, preferably, are located in the same neighborhood or a nearby one. If similar homes have a taxable value lower than yours, this is strong evidence that you’re over-assessed.
Consider this example. Caitlin and Marcelo own a three-bedroom ranch-style home in a subdivision with many homes like theirs. The taxable value of their home is $375,000. They believe this amount is too high. They check the records for a dozen similar homes in their subdivision and discover that the average taxable value of those homes is $340,000. Moreover, most have finished basements, and Caitlin and Marcelo do not have this amenity. The couple now has good evidence for claiming that the taxable value of their home is too high.
If you bought your house recently, the price you paid is excellent evidence of its current value. Regardless of when you bought your home, you should gather information about recent sales prices of similar homes in your community. Finding these sales prices may take some doing. For advice on gathering this kind of evidence, see Listing Your House: What List Price Should You Set? Some online resources such as Zillow can also be useful.
Try to avoid transactions in which the buyer has purchased a home from a relative, or at a foreclosure or property tax sale. The sales prices in such transactions may be artificially low and won’t be convincing evidence of true market value.
You can also consider asking an experienced real estate broker to give you information about recent home sales in your area. You might need to pay a modest fee for such assistance. If the stakes are high, you can hire a private appraiser to gather the information and provide a written report, though this will be more expensive. A local lender or real estate broker might be able to recommend a qualified appraiser. If not, explore the Appraisal Institute website, which allows you to search for a professional assessor by zip code.
Note that if you recently refinanced your home or took out a home equity loan, the lender probably ordered a professional appraisal. Obtain a copy of it. It may give you powerful ammunition in your quest for a reduced taxable value.
After investigating the taxable value of your home, you might conclude that the number set by the assessor is too high. Contact your local taxing authority to find out what measures you can take to reduce the home's taxable value.
]]>Fortunately, there are two possible ways to reduce your property tax burden. The first method is available to all Ohio homeowners. The second depends on whether you meet certain qualifications. If you meet those qualifications, you can seek tax relief using both methods.
You may know that the authorities compute your property tax by multiplying your home’s taxable value by the tax rate. The taxable value of the home is ordinarily considered to be its fair market value; that is, the amount it would be worth if sold, taking into account its size, neighborhood, and condition.
Imagine, for example, that Mike and Wendy own a home in Ohio. The assessor has placed a taxable value of $200,000 on it. If the tax rate is 1%, Mike and Wendy will owe $2,000 in property tax. If they can reduce the taxable value of their home, their property tax bill will be lower. Let's say that Mike and Wendy appeal the $200,000 taxable value of their home. The appeals board agrees, and reduces that value to $150,000. Given this, Mike and Wendy owe only $1,500 in property tax on their Ohio home.
Value assessments of homes are public. This means that you can get a copy of the assessment from your Ohio county clerk's office to ensure that the local government has the correct information about your home and is not needlessly overvaluing it.
If you believe that the tax assessor has misjudged the value of your home, or if the taxable value is higher than that of similar homes, you may wish to pursue an appeal.
In addition to trying to reduce the taxable value of your home, Ohio property tax law allows for reduced property taxes if you meet certain requirements. Below is a summary of the most common such programs in Ohio.
Senior homestead exemption. If you are 65 years old or older, you may qualify for an exemption of the first $25,000 of your home’s taxable value. Your annual income must be less than $32,800, a figure that changes every few years to adjust for inflation.
Disabled homestead exemption. If you are totally and permanently disabled, or the surviving spouse of such a person, you may qualify for the same exemption as seniors do. The same income limit applies.
Veterans exemption. If you're a U.S. military veteran who is totally and permanently disabled, you’re eligible for a larger exemption: the first $50,000 of your home’s taxable value. And there’s no income limit. Are you the surviving spouse of a veteran who was receiving this exemption when he or she died? Were you living in the home at that time? If your answer to both questions is yes, you may be able to continue receiving the exemption. Again, there’s no income limit.
Although Ohio laws set statewide property tax rules, your local government handles the administration and levying of the tax. Thus you'll want to contact your local tax assessor for complete details on property tax exemptions. Be sure to ask about any forms you need to complete and the deadline for filing those forms. You can get contact information for your tax assessor from Ohio's online directory.
In addition to your property tax, which is based on the assessed value of your home, your tax bill may include "special assessments," which are essentially line-item fees. Typically these are made to pay for improvements, such as street paving or repaving, in your neighborhood. Note that if you are part of a homeowners' association, that association may levy these sorts of assessments independent of your state property tax bill.
Depending on the complexity of your particular situation, you might want to seek legal help to reduce your Ohio property tax. To find an experienced real estate lawyer in Ohio, check out Nolo’s Lawyer Directory.
]]>So how can you reduce your property tax burden? There are two primary methods. The first is available to all homeowners. The second depends on whether you meet certain qualifications under the Illinois tax code. If you do, you can seek tax relief using both methods.
You may know that the Illinois authorities compute your property tax by multiplying your home’s taxable value by the tax rate. The taxable value is essentially the fair market value of your home, taking into account its condition, location, and size.
For example, imagine that the state tax assessor has placed a taxable value of $200,000 on the Samsons’ home. If the tax rate is 1%, they will owe $2,000 in property tax.
If you can reduce the taxable value of your home, your property tax bill will be lowered. Imagine that the Samsons decide to appeal the $200,000 taxable value of their home, insisting that the value is actually lower. The appeals board reduces that value to $150,000. Now, the Samsons owe only $1,500 in property tax.
You may check the appraisal value of your home with your county clerk's office. Be sure that it properly describes your home's size, and does not overestimate its condition.
If you believe that the Illinois tax assessor has misjudged the value of your home, or if the taxable value is higher than that of similar homes, you might want to pursue an appeal.
Beyond trying to lower the appraised value of your home in the eyes of the assessor, Illinois also allows for reduced property taxes if you meet certain requirements. The chief statewide programs in Illinois are summarized here. For the law itself, see Illinois's Property Tax Code at 35 ILCS Section 200.
Contact your local tax assessor for complete details on these and other Illinois property tax exemptions, including any required forms you need to complete and the deadline for filing those forms. Contact information for the assessor’s office is available from this online list of Illinois assessors.
Depending on the complexity of your situation, you may want to seek legal help. To find an experienced real estate lawyer in Illinois, check out Nolo’s Lawyer Directory.
]]>For federal income tax purposes, the seller is treated as paying the property taxes up to, but not including, the date of sale. You (the buyer) are treated as paying the taxes beginning with the date of sale. This applies regardless of the lien dates under local law. Generally, this information is included on the settlement statement you get at closing. You and the seller each are considered to have paid your own share of the taxes, even if one or the other paid the entire amount. You each can deduct your own share, if you itemize deductions, for the year the property is sold.
Not all charges imposed on homeowners by the government are deductible. The following items are not deductible as property taxes.
According to the IRS, an itemized charge for services to specific property or people is not a tax, even if the charge is paid to the taxing authority. You cannot deduct the charge if it is:
You must look at your property tax bill to determine if any nondeductible itemized charges are included in the bill. If your taxing authority (or lender) does not furnish you a copy of your real estate tax bill, ask for it. Contact the taxing authority if you need additional information about a specific charge on your bill.
You also cannot deduct amounts you pay for local benefits that tend to increase the value of your property. Local benefits include the construction of streets, sidewalks, or water and sewer systems. You must add these amounts to the basis of your property; that is, the total value of the property for tax purposes. Increasing your basis this way will reduce any taxable profit when you sell the property.
However, there is an exception to this rule: Any part of a special assessment you pay that is for maintenance, repairs, or an interest charge for a local benefit for your property is deductible. You may claim this deduction only if the taxing authority sends you an itemized tax bill separately listing the amounts you must pay for construction, interest, and maintenance.
Example: A city assessed a front foot benefit charge against property that was benefited by construction of a water system. The city’s tax bill itemized the charge, showing how much was assessed for construction of the water system, interest, and maintenance costs. Taxpayers were allowed to deduct the amounts for interest and maintenance.
Before 2018, you could deduct the full amount of property tax you paid on your home without any limit. This enabled homeowners with expensive homes and large property tax bills to take substantial deductions. However, the Tax Cuts and Jobs Act imposed a $10,000 annual limit on the property tax deduction for 2018 through 2025. The $10,000 annual limit applies to the total amount you pay for:
Example: George owns a $1 million home on which he pays $12,000 in property tax each year. He also paid $10,000 in state income tax. He may deduct only $10,000 of these amounts each year during 2018 through 2025. The remaining $12,000 is not deductible.
Property tax is deducted as an itemized personal deduction on IRS Schedule A. This means you may deduct your property taxes only if you itemize your personal deductions instead of taking the standard deduction. The Tax Cuts and Jobs Act roughly doubled the standard deduction to $12,000 for single taxpayers and $24,000 for married taxpayers who file jointly (as almost all do).
You should itemize your deductions on Schedule A only if all your itemized deductions exceed the $12,000 (single) or $24,000 (marrieds) threshold. With the standard deduction so high, far fewer taxpayers will be able to itemize their deductions than in the past. In fact, millions of homeowners who have property tax bills will be unable to deduct them.
Example: Stan and Sandra are married homeowners who pay $3,000 in property tax each year and $2,000 in state income tax. Their total itemized deductions amount to $8,000 so they take the $24,00 standard deduction instead of itemizing. They get no deduction for their property taxes.
However, many homeowners who can't deduct their property taxes will still be better off because they benefit from the high standard deduction and other tax reductions brought about by the Tax Cuts and Jobs Act.
]]>Opening your tax bill can be a cause for shock, if not outrage. But by learning how property taxes are computed in Illinois, you can investigate whether the assessed value of your home is too high, and the basis of an excessive property tax bill.
This article describes the tax assessment process in Illinois. It will help you determine whether the taxable value of your home is higher than it should be. If so, we'll describe measures you can take to have that value reduced. Through this process, you might be able to knock some dollars off your property tax bill.
(For the letter of the law on this matter, see the Illinois Property Tax Code, at 35 ILCS 200.)
In Illinois, two factors determine your tax bill: first, the taxable value of your home, and second, the tax rate (that is, the percentage of the taxable value that the local tax authorities use to compute your property tax). You can learn more from the website of the Illinois Department of Revenue, which provides links to county-specific information. Below is an overview of these factors.
The process starts when a local public official determines your home’s taxable value. Depending on where you live in Illinois, this official may be the county assessor, the county supervisor of assessments, or the township assessor. The term “assessor” in this article will cover all of these officials.
Each Illinois county has a slightly different calculation. In most counties, the taxable value of a home is 33-1/3% of the home’s “fair cash value.” The fair cash value is basically the amount for which the home would sell on the open market. In Cook County (Chicago), for example, the percentage (in the case of residential property) is 10% of the fair cash value. The percentage figures are also known as the assessment ratio.
The taxing authorities multiply the taxable value of your home by the tax rate to arrive at the tax you’ll owe. Let’s say the taxable value of your home is $300,000 and the tax rate is $10 for every $1,000 of taxable value. Your property tax for the year will be $3,000 (300 x $10 = $3,000).
Local officials set the tax rate, so the rate varies depending on where you live. You cannot do much about the tax rate except to vote wisely for the elected officials who determine it, and carefully consider revenue issues that appear on the ballot.
But the story is different for the taxable-value factor. Here, you have more leverage. If the taxable value assigned to your home is too high, you may be able to get it reduced, and save a bundle in property tax as a result.
Let's say, for example, that Larry and Joan own a home in Illinois. The tax assessor has placed a taxable value of $400,000 on the property. The local tax rate is $10 for every $1,000 of taxable value. This means that their annual property tax is $4,000. After researching recent sales of comparable homes, Larry and Joan conclude that the taxable value of theirs should be $350,000. They successfully appeal their assessment. Now, their tax bill is only $3,500 a year instead of $4,000.
Contact information for your tax assessor can be found on the State of Illinois Illinois Property Tax Appeal Board website.
The tax record for your home may contain inaccurate or incomplete information that leads the tax assessor to place too high a value on it. You can get of a copy of the tax record at the assessor’s office. To locate it, call city hall, or look online at the State of Illinois' Department of Revenue website discussing property taxes, mentioned above. Some counties make assessment records available online.
Review the tax record for errors. Among other things, check the following:
If you spot incorrect or incomplete information, let the tax authorities know. That way, the record can be corrected and the taxable value adjusted.
But even if the tax record is accurate, you may disagree with the tax assessor's conclusion regarding the market value of your home. In that case, you will need to do more.
Two types of information can help you establish that the assessor has placed too high a taxable value on your home. The first (and most important) is how the assessor has treated homes similar to yours. The second is how much homes like yours are currently selling for.
Review the assessment records for homes in your community that resemble your own. You will find those records at the assessor’s office.
Finding comparable homes will take time and effort, but can be worth it if you believe that your home is truly over-valued. Try to find homes that have approximately the same square footage as yours and are located in the same neighborhood or a nearby one. If similar homes have a taxable value lower than yours, this is strong evidence that you’re over-assessed.
Consider this example. Todd and Liz own a three-bedroom ranch-style home in a subdivision with many homes like theirs. The taxable value of their home is $375,000. They believe this amount is too high. They check the records for a dozen similar homes in their subdivision and discover that the average taxable value of those homes is $340,000. What’s more, most of the other homes have finished basements, while Todd and Liz's doesn’t. Todd and Liz have good evidence for claiming that the taxable value of their home is too high.
If you bought your house recently, the price you paid is excellent evidence of its current value. Regardless of when you bought your home, you should gather information about recent sales prices of similar homes in your community. Finding these sales prices may take some doing. For advice on gathering this kind of evidence, see Listing Your House: What List Price Should You Set?
Some online resources such as Zillow can be useful, though bear in mind that the evaluations found on such websites are generated by a computer, which has obviously never visited the home.
Try to avoid transactions in which the buyer has purchased a home from a relative, or at a foreclosure or property tax sale. The sales prices in such transactions may be artificially low and won’t be convincing evidence of true market value.
Also consider asking an experienced real estate broker to give you information about recent home sales in your area, based on data found within the Multiple Listing Service. You may need to pay a modest fee for such assistance.
If the stakes are high, you can hire a private appraiser to provide a written report, though this will be more expensive. A local lender or real estate broker may be able to recommend a qualified appraiser. If not, check out the Appraisal Institute website for referral.
Tip: If you recently refinanced your home or took out a home equity loan, the lender probably ordered a professional appraisal. Get a copy of it. It may give you ammunition in your quest for a reduced taxable value.
To successfully challenge the taxable value, you’ll need to establish at least one of the following facts:
If you’re convinced that any of these facts is true, consider the following strategy for trying to get your taxable value reduced.
If you have convincing evidence that the assessor has overvalued your home, the assessor may agree to change the value. If that happens, you won’t need to pursue an administrative appeal. You can get contact information for the tax assessor or assessors in your county at the Illinois Property Tax Appeal Board website.
Most assessors are hard-working officials who take pride in their work, and do their best to treat homeowners fairly. It’s best to phone ahead for an appointment with the tax appraiser or an assistant. Before your meeting, make extra copies of your evidence, such as tax appraiser reports, related to the value of your home. When you meet, assume that the assessor is acting in good faith and is willing to consider your evidence. There’s no need to be argumentative or to complain about how property taxes have become burdensome. Just stick to evidence that warrants a lower taxable value for your home.
The assessor may change the taxable value on the spot but, more likely, will need a few days or weeks to look into the issue.
If you can’t reach agreement with the assessor, you can appeal the valuation. Here’s where to appeal and useful evidence for doing so.
You can appeal your home valuation by completing the Residential Appeal Form, which you’ll find the website of the Illinois Property Tax Appeal Board. Click on the "Getting Started" link, and scroll down to the bottom where you can access the form. File the completed form with the county board of review within 30 days after the assessment amount is established. The tax assessor’s office can give you details on what additional paperwork you may need to submit and the deadline for such submissions. There will be a hearing where your evidence will be considered.
In pursuing your appeal, several types of evidence might be useful, including:
At the hearing, you’ll probably have just five or ten minutes to present your case, so be succinct. Bring extra copies of your documentary evidence so that each hearing officer has a copy. Try to include a chart showing comparative sales prices and taxable values. You might want to arrive early so that you observe and learn from other people’s hearings.
If you don’t agree with the decision of the county appeal board, you have two options for a further review. One option is to appeal in writing to the state’s Property Tax Appeal Board. The other option is to go to court, in which event you’ll probably need to hire a lawyer to advise or represent you.
Check out The Illinois Property Tax System, a detailed guide to local property taxes in the state, published by the Illinois Department of Revenue. This document provides a helpful summary of the state's property tax statutes (available at 35 ILCS 200).
]]>When I bought my home, I spent a lot of time carefully choosing the mortgage lender. After filling out the application, supplying all of the required documentation, and getting the loan approved, I was surprised to find out that my relationship with that lender is likely a relatively short one. (I recently found out that mortgage lenders often sell the loans that they originate in order to bring in income so that they can turn around and—I guess no surprise here—make more loans.) If my lender sells my loan to a new owner, how will I find out?
If the lender sells your mortgage loan to a new owner, the new owner must, by law, notify you of that fact. (This notice is different from the notice that your mortgage servicer must send you if the servicing rights are transferred.)
Read on to learn more about the difference between a mortgage owner and servicer, when the new owner of your mortgage loan will send you notice about an ownership transfer, and what sort of information the notice will contain.
First, let’s define the terms “lender,” “owner”, and “servicer” when it comes to the mortgage business.
The mortgage lender or owner. The mortgage lender is the financial institution that loaned you the money. The lender is the loan owner at this point. Later on, the lender may sell the mortgage debt to another entity (often called an "investor"), which then becomes the new owner of the loan.
Mortgages are bought and sold frequently in the mortgage industry. The sale of your mortgage loan to a new owner does not affect the terms or conditions of the mortgage contract.
The servicer. A mortgage servicer handles the day-to-day tasks associated with mortgage loans, such as collecting and processing payments, responding to borrower inquiries, managing escrow accounts, and processing foreclosures.
The servicer might be the lender that gave you your loan, or a subsequent owner of the loan. Or, it might be a separate company that acts on behalf of the owner. If a separate company is the servicer, the owner of the loan will rely on that company to handle the management of your loan account. (Learn more about how mortgage servicing works.)
In 2009, President Obama signed the Helping Families Save Their Homes Act of 2009 into law. Among other things, it amended the Truth in Lending Act to require that borrowers get notice when the mortgage debt on their primary home has been sold, transferred, or assigned to a new creditor.
When you'll get notice about the new owner. The creditor that is the new owner or assignee of the mortgage debt must notify you about the change of ownership no later than 30 days after the sale, transfer, or assignment.
What the notice will say. The notice that your new lender sends to you must include:
If your mortgage debt is sold and you get an ownership transfer notice, this doesn't necessarily mean that the servicing rights to the mortgage were also sold or that you'll get a new servicer.
How you’ll know if your servicer changes. In most situations:
Or the servicers might choose to send a combined notice not less than 15 days before the transfer.
If you have questions about your loan, contact your servicer. It's important that you send your monthly payments to the servicer of your mortgage, not the loan owner—unless the owner is also the servicer. You should also direct any questions that you have about your loan to your servicer.
How you can find out who your servicer is. To find out who your servicer is, check your monthly mortgage billing statement or payment coupon book. The servicer is the company that you make your payments to.
]]>The bad news is that the rent you receive is taxable income that you must report to the IRS.
The good news is that your taxable rental income can be wholly or partly offset by the tax deductions you'll be entitled to.
If you rent out a room in your home, the tax rules apply to you in the same way as they do for landlords who rent out entire properties. This means you get to deduct the expenses arising from your rental activity. There is one big difference however: You must divide certain expenses between the part of the property you rent out and the part you live in, just as though you actually had two separate pieces of property.
You can fully deduct (or, where applicable, depreciate) any expenses just for the room you rent—for example, repairing a window in the room, installing carpet or drapes, painting the room, or providing your tenant with furniture (such as a bed). In addition, if you pay extra homeowners’ insurance premiums because you’re renting out a room, the full cost is a deductible operating expense. If you install a second phone line just for your tenant’s use, the full cost is deductible as a rental expense. However, you cannot deduct any part of the cost of the first phone line even if your tenant has unlimited use of it.
Expenses for your entire home must be divided between the part you rent and the part you live in. This includes your payments for:
You can also deduct depreciation on the part of your home you rent.
You can use any reasonable method for dividing these expenses. It may be reasonable to divide the cost of some items (for example, water) based on the number of people using them. However, the two most common methods for dividing an expense are either based on the number of rooms in your home or based on the square footage of your home.
Example 1: Jane rents a room in her house to a college student. The room is 10 × 20 feet, or 200 square feet. Her entire house has 1,200 square feet of floor space. Thus, one-sixth, or 16.67% of her home is rented out. She can deduct as a rental expense one-sixth of any expense that must be divided between rental use and personal use.
Example 2: Instead of using the square footage of her house, Jane figures that her home has five rooms of about equal size, and she is renting out one of them. She determines that one-fifth, or 20%, of her home is being rented. She deducts 20% of her expenses that must be divided between rental and personal use.
As the examples show, you can often get a larger deduction by using the room method instead of the square footage of your home.
Be sure to keep good records of your deductible expenses when you rent out a room.
You may also qualify for the new pass-through tax deduction established by the Tax Cuts and Jobs Act. Starting in 2018 (and scheduled to last through 2025) pass-through business owners—that is, owners of any business other than a regular C corporation—may deduct up to 20% of their net business income from their income taxes (less if taxable income exceeds certain levels). Renting a room to short-term guests can qualify as a business, especially if you earn a profit each year. Thus, if you own and operate your room rental activity as an individual (or tenant in common) or through an LLC or partnership, you may qualify for this valuable deduction.
For more on this topic, see Tax Guide for Short-Term Rentals: Airbnb, HomeAway, VRBO and More, by Stephen Fishman.
]]>As far as taxes are concerned, repairs to a personal residence are meaningless. The only way you can deduct all or part of the cost of home repairs for your residence is if you qualify for the home office deduction or rent out part of the home.
You can deduct all or part of home repair costs if you have a business and use a portion of the home as an office for the business. To qualify for the home office deduction you must have a legitimate business and use part of your home exclusively and regularly for the business.
If you qualify for this deduction, you can deduct 100% of the cost of repairs you make just to your home office. For example, if you use a bedroom in your home as a home office and pay to replace broken window with a similar window you may deduct the entire cost.
Repairs that benefit your entire home are deductible according to the percentage of home office use. For example, if you use 20% of your home as an office, you may deduct 20% of the cost to repair your home heating and air conditioning system.
Another way to deduct home repair costs is to rent out a portion of your home. Then you can deduct all or part of the expense as a rental expense. This amount is deducted from the rental income you receive.
As with the home office deduction, improvements that repair only the portion of the home being rented can be deducted in full. Repairs that benefit the entire home can be deducted according to the percentage of rental use of the home.
]]>The lender adds the cost of PMI to your mortgage payment each month, in an amount based on how much you've borrowed. The good news is that PMI can usually be canceled after your home's value has risen enough to give you 20% to 25% equity in your house.
The federal Homeowners' Protection Act, which applies to people who bought their homes after July 29, 1999, established some baseline rules about canceling PMI.
The Act says you can ask that your PMI be canceled when you've paid down your mortgage to 80% of the loan. You must have a good record of payment and compliance with the terms of your mortgage, you make a written request, and you have to show that the property's value hasn't gone down. You also have to show that you haven't encumbered the property with liens, such as a second mortgage. If you meet all these conditions, the lender must grant your request to cancel the PMI.
What's more, when you've paid down your mortgage to 78% of the original loan, the law says that the lender must automatically cancel your PMI. But don't count on the lender to notice—keep track of the date yourself. Unfortunately, it might take years to get to this point. Because of amortization, your schedule of payments is front-loaded so that you're mostly paying off the interest at first.
Even if you haven't paid down your mortgage to one of these legal limits, you can start trying to get your PMI canceled as soon as you suspect that your equity in your home or your home's value has gone up significantly, perhaps because your home's value has risen along with other local homes or because you've remodeled.
Such value-based rises in equity are harder to prove to your lender. Some lenders require you to wait a minimum time (around two years) before they will approve the cancellation of PMI on this basis and your mortgage balance might need to be paid down to 75%.
The exact procedures for getting your lender to cancel your PMI are largely in the hands of your lender—or, to be more accurate, in the hands of the company from whom your lender buys the insurance (though you'll never deal with that company directly). You'll most likely need to:
Most lenders recognize that there's little point in requiring PMI after it's clear that you're making your mortgage payments on time and that you have enough equity in your property to cover the loan if the lender has to foreclose. Nevertheless, many homebuyers find their lenders to be frustratingly slow to cancel the coverage. The fact that they'll have to spend time reviewing your file for no immediate gain and that the insurance company might also drag its feet are probably contributing factors.
If your lender refuses, or is slow to act on your PMI cancellation request, politely but firmly request action. Contact the lender by letter or email. Copies of such communication are important to prod the lender into motion and serve as evidence if you're later forced to take the lender to court.
You can also submit a complaint online to the Consumer Finance Protection Bureau (CFPB). This U.S. government agency promises to forward your complaint to the company and work to get a response.
If nothing else works, and court action becomes your best option, small claims court can be a good avenue, and you won't need a lawyer to accompany you. For more information, including how to write polite but forceful demand letters, see Everybody's Guide to Small Claims Court, by Cara O'Neill (Nolo). Or, for online information on going to small claims court, also see Nolo's Small Claims Court FAQ.
To learn more about PMI and other aspects of buying a home, see Nolo's Essential Guide to Buying Your First Home, by Ilona Bray, Ann O'Connell, and Marcia Stewart (Nolo).
]]>In the United States, mineral rights can be sold or conveyed separately from property rights. As a result, owning a piece of land does not necessarily mean you also own the rights to the minerals beneath it. If you didn’t know this, you’re not alone. Many property owners do not understand mineral rights.
This article will discuss what mineral rights are, how they can be conveyed separately from the land they lie beneath, and whether you should worry about someone else owning the mineral rights under your property.
A mineral owner has the right to extract and use minerals found beneath the surface of a particular piece of land. Exactly which minerals are included depends on the terms of the specific conveyance (the document within which someone bought or sold the rights). The conveyance might include all the minerals under the land, or be limited to specified minerals.
The most commonly extracted minerals in most areas are natural gas, oil, and coal (although a mineral owner might also own and extract gold, silver, or other minerals). Occasionally, a mineral rights transfer also includes surface rights. If so, the mineral owner also has the right to extract minerals on the surface of the land, such as clay or gravel.
Mineral rights are automatically included as a part of the land in a property conveyance, unless and until the ownership gets separated at some point by an owner/seller. An owner can separate the mineral rights from land by:
Since sellers of land can convey only property that they own, each sale of the land after the minerals are separated automatically includes only the land. Deeds to the land made after the first separation of the minerals will not refer to the fact that the mineral rights are not included.
This means that, in most cases, you cannot determine whether you own the rights to the minerals under your land just by looking at your deed. Owners are sometimes surprised to find out someone else owns the rights to the minerals under their land.
It is typically a costly process to find out whether someone other than the landowner owns the mineral rights. And perhaps you don’t really need to find out. After all, removing underground minerals tends to involve great expense, so a mineral owner probably won’t find it worthwhile to remove the minerals unless they are valuable and abundant.
For example, if you live in an area that has not historically seen any oil or natural gas drilling, coal mining, or other mineral extractions, it’s not likely that there are many valuable minerals under your land that a mineral owner would bother to remove. It’s even likely that the mineral ownership on your land has not been separated, and that if you own the land, you own the minerals.
Additionally, U.S. laws regulating mining and mineral rights typically prohibit mineral owners from damaging or interfering with the use of any homes or other improvements on the land when extracting minerals. As a result, mineral owners do not typically attempt mineral extraction in highly populated areas. This means that if you live in a city, or an area with many houses on small plots of land, you probably won’t need to worry about whether or not you own any minerals that might be under you.
In areas where mineral exploitation is common, whether or not you own the minerals under your land might be a real concern. For example, if your property is in an area where oil rigs are an everyday sight, where natural gas drilling is prevalent, or where coal mining operations exist, if you don’t own the minerals under your land, the mineral owner might come calling.
A mineral owner’s rights typically include the right to use the surface of the land to access and mine the minerals owned. This might mean the mineral owner has the right to drill an oil or natural gas well, or excavate a mine on the property. The mineral owner is also commonly allowed to build roadways or other improvements necessary to facilitate the mineral extraction.
Sometimes the terms of the conveyance of the mineral rights restrict the mineral owner’s rights. For example, a mineral deed might put a time limit on how long drilling can continue, or restrict excavation to a certain depth. Additionally, to protect the land owner and the environment, state and local laws regulating mining and drilling typically contain restrictions on mineral extraction activities.
If a mineral owner contacts you about removing minerals under your land, your first step should be to contact a lawyer in your area experienced in mineral law. The attorney can help you wade through this complex legal area and determine who really owns the minerals under your land (an arduous process of tracing deeds back to the original mineral reservation or conveyance). A number of owners might even own the rights to different minerals. Additionally, sometimes mineral royalties (the right to profit from the minerals) are conveyed separately from the mineral ownership rights.
If someone has a valid ownership right, you might not be able to prevent them from removing the minerals. You can, however, talk with the attorney about how to minimize the removal operations’ impact on you and your land. At a minimum, the attorney can take steps to ensure that the mineral owner complies with any and all restrictions and regulations governing the mineral extraction and clean-up process.
]]>One confusing thing about basis is that it can change over time. When this occurs, your basis is called "adjusted basis." To determine the amount of your basis, you begin with your starting basis and then add or subtract any required adjustments.
If you’ve purchased your home, your starting point for determining the property’s basis is what you paid for it. Logically enough, this is called its cost basis. Your cost basis is the purchase price, plus certain other expenses. You use the full purchase price as your starting point, regardless of how you pay for the property—with cash or a loan. If you buy property and take over an existing mortgage, you use the amount you pay for the property, plus the amount that still must be paid on the mortgage.
Example: Jan buys her home for $60,000 cash and assumes a mortgage of $240,000 on it. The starting point for determining her basis is $300,000.
Certain fees and other expenses you pay when buying a home are added to your basis in the property. Most of these costs should be listed on the closing statement you receive after escrow on your property closes. However, some might not be listed there, so be sure to check your records to see if you’ve made any other payments that should be added to your property’s basis. These include real estate taxes owed by the seller that you pay, settlement fees and other costs such as title insurance.
You cannot use cost as the starting basis for a home that you received as an inheritance or gift. The basis of property you inherit is usually the property’s fair market value at the time the owner died. Thus, if you hold on to your rental property until death, your heirs will be able to resell it and pay little or no tax—the ultimate tax loophole.
Example: Victoria inherits her deceased parents' home. The property’s fair market value (excluding the land) is $300,000 at the time of her uncle’s death. This is Victoria’s basis. She sells the property for $310,000. Her total taxable profit on the sale is only $10,000 (her profit is the sales price minus the home's tax basis).
The basis of a home or other property you receive as a gift is its adjusted basis in the hands of the gift giver when the gift was made.
If you build your home yourself, your starting basis is the cost of construction. The cost includes the cost of materials, equipment, and labor. However, you may not add the cost of your own labor to the property’s basis. Add the interest you pay on construction loans during the construction period, but deduct interest you pay before and after construction as an operating expense.
Your basis in property is not fixed. It changes over time to reflect the true amount of your investment. This new basis is called the adjusted basis because it reflects adjustments from your starting basis.
Your starting basis in your home must be reduced by any items that represent a return of your cost. These include:
You must increase the basis of any property by:
In addition, assessments for items that tend to increase the value of your property, such as streets and sidewalks, must be added to its basis. For example, if your city installs curbing on the street in front of your rental house, and assesses you for the cost, you must add the assessment to the basis of your property.
The most common way homeowners increase their basis is to make home improvements. Improvements include any work done that adds to the value of your home, increases its useful life, or adapts it to new uses. These include room additions, new bathrooms, decks, fencing, landscaping, wiring upgrades, walkways, driveway, kitchen upgrades, plumbing upgrades, new roofs.
However, adjusted basis does not include the cost of improvements that were later removed from the home. For example, if you installed a new chain-link fence 15 years ago and then replaced it with a redwood fence, the cost of the old fence is no longer part of your home's adjusted basis.
Example: Jane purchased her home for $200,000 and sold it ten years later for $300,000. While she owned the home, she made $50,000 worth of improvements, including a new bathroom and kitchen. These increased her basis to $250,000. She also received $10,000 in insurance payments one year to reimburse her for storm damage to the house. This payment decreased her basis to $240,000. She subtracts her $240,000 adjusted basis from the $300,000 sales price to determine her gain from the sale—$60,000.
Also see Tax Reasons to Keep Good Records of Home Improvements.
]]>The home office deduction is available to renters and homeowners alike. It is available for office space and other areas you use for business in your home; such as a studio, workshop, or garage. And according to the IRS, your "home" can be a house, condo, or apartment unit—or even a mobile home or boat, as long as you can cook and sleep there. However, you must meet two tax law requirements to qualify for the home office deduction:
Requirement #1: Regular and exclusive use. You must regularly use part of your home exclusively for a trade or business.
Requirement #2: Principal place of business. You must also be able to show that you use your home as your principal place of business. Alternatively, you must be able to show at least one of the following:
We'll explain these requirements in turn below. For information on a simplified home office deduction for deductions under $1,500 per year, see The Simplified Home Office Deduction.
Ordinary business expenses are deductible even if you don't qualify for the home office deduction. If you don't meet the rules above, you can still deduct ordinary and necessary business expenses that you incur at home—for instance, long-distance phone calls, a separate business telephone line, and the cost of office supplies and equipment. The above IRS rules apply only to the expenses of actually running and maintaining your home, such as utilities, rent, depreciation, home insurance, mortgage interest, real estate taxes, and repairs.
To take deductions for home-related expenses, you must regularly use part of your home exclusively for your trade or business.
Regular use. The IRS doesn't offer a clear definition of regular use—only that you must use a part of your home for business on a continuing basis, not just for occasional or incidental business. You can probably meet this test by working a couple of days a week from home, or a few hours each day.
Exclusive use. Exclusive use means that you use a portion of your home only for business. If you use a room of your home for your business and also for personal purposes, you don't meet the exclusive use test. However, you can set aside a portion of a larger room to be used only for business, as long as your personal activities don't stray into it.
Brook, a lawyer, uses a den in his home to write legal briefs and prepare contracts. He also uses the den for poker games and hosting a book club. Because he uses the den for both business and pleasure, Brook can't claim business deductions for using the den.
Marvin has a den he uses only for business. He also puts a business calendar, desk, and computer in his kitchen, but continues to cook and eat there as well. Marvin can claim business deductions for the den, but not the kitchen.
There are two exceptions to the exclusive use rule: You don't have to meet the exclusive use test if you use part of your home to store inventory or product samples, or if you run a qualified day care facility at your home. (The storage exception is discussed just below. For the day care rules, check IRS Publication 587, Business Use of Your Home, at www.irs.gov.)
Storing inventory or product samples at home. If you store inventory or samples at home, you can deduct expenses for the business use of your home, whether or not you use the storage space exclusively for business.
There are two limitations, however: First, you won't qualify for the deduction if you have an office or other business location outside of your home. Second, you have to store the products in a particular place—your garage, for example, or a closet or bedroom. It's okay to use the storage space for other purposes as well, as long as you regularly use it for storing inventory or samples.
Jim sells heating and air conditioning filters to small businesses. His home is the only fixed location of his business. Jim regularly stores his inventory of filters in half of his basement. He sometimes uses the same area for working on his racing bikes. Jim can deduct the expenses for the storage space, even though he doesn't use that part of his basement exclusively for business.
Finally, the home office deduction is available only if you are running a bona fide business. If the IRS decides that you are indulging a hobby rather than trying to earn a profit, it won't let you take the home office deduction. For information that will help you prove that you're really running a business, see How to Prove Your Hobby Is a Business.
]]>You can rent out your vacation home for up to 14 days per year and all the rental income you receive is tax free, no matter how much you earn. In fact you don't even have to report the income to the IRS. This rule can provide you with a real windfall if you own a vacation home in a desirable area where people are looking for short-term rentals.
Your vacation home rental income is tax free only if, during the year:
Example. Claudia rents her Florida beachfront condominium for 14 days during the summer. She lives in the condo herself for two months during the year. Her condo qualifies as a tax-free vacation home.
Determining whether vacation rental income is tax free depends on how many days during the year the home is used for personal use by the owner and how many days it’s rented. As you might expect, there are tax rules for determining this.
A day of personal use of a vacation home is any day that it is used by:
Any day you rent your vacation home at a fair market rent is a day of rental use no matter who you rent it to, unless it’s a family member who doesn’t live there full-time. Any day you rent your vacation home to anyone for less than a fair rental price is considered a day of personal use.
A fair rental price for your property is the amount of rent that a person who is not related to you would be willing to pay. The rent you charge is not a fair rental price if it is substantially less than the rents charged for other properties that are similar to your property.
Example. Dylan owns a vacation home that he used himself for 14 days and rented as follows:
Dylan's own use is personal use. The two days he rented it his brother are also personal days because his brother doesn’t live there full-time. The four days his mother used the house are also personal days. The 14 days he rented it to strangers for a fair market price are rental days. The two days he let a friend use it for a below market rental are personal days. His totals for the year are: Rental days = 14, Personal days = 22.
The vacation home qualifies as a tax-free vacation home because it was used personally more than 14 days and rented less than 15 days. So, Dylan doesn't have to pay any income tax on the rental income he received. Had Dylan rented it to the strangers for one more day, the house would have come within the vacation home used as residence category with very different tax results.
The tax deduction rules applicable to any personal vacation home or second home apply to vacation homes in this category. Under these rules, all your real estate taxes are deducted as a personal itemized deduction on your IRS Schedule A. Because the home is treated as a personal residence for tax purposes, you may not deduct any operating expenses for the property or take any depreciation deduction. You don’t file Schedule E, the tax form landlords file to report their income and expenses, because your home is not a rental property.
]]>So, do you know what your home's tax basis is? Just as important: Can you prove it to the Internal Revenue Service (IRS)? That's what we'll discuss here.
If you’ve purchased your home, your starting point for determining it’s basis is what you paid for it. This includes the purchase price, as well as closing costs such as settlement fees, appraisal fees, legal fees, transfer taxes, title insurance premiums, credit report fees, property inspection costs, and any amounts owed by the seller that you agreed to pay.
The cost of any improvements you make to your home while you own it are added to its basis. This reduces the amount of gain you'll realize when you sell the property.
Improvements are more than everyday home repairs, such as painting or replacing a cracked window or a few roof tiles. They include any work done that adds to the value of your home, increases its useful life, or adapts it to new uses. These might include, for example, room additions, new bathrooms, decks, fencing, landscaping, wiring upgrades, new walkways or driveways, kitchen upgrades, plumbing upgrades, and a new roof. Restoring damaged property with something new or like-new also counts.
In addition, assessments for items that tend to increase the value of your property, such as streets and sidewalks, should be added to its basis.
Certain other items must be subtracted from your basis, which increases any profit you realize when you sell the home. These include:
You need to document each element of your home's tax basis. The original cost can be documented with copies of your purchase contract and closing statement.
Improvements should be documented with purchase orders, receipts, cancelled checks, and any other documentation you receive. The records homeowners most often lose are those for improvements, so take special care to keep track of these. It's a good idea to list them all in your personal records with a running total.
You should keep all improvement-related records for as long as you own the home, plus at least three years after you file your tax returns for the year of the sale. Also, you should keep copies of all your tax returns forever.
But if you sold a home before May 7, 1997, and postponed tax on any gain, the basis of that home affects the basis of the new home you bought. This means you need to keep records proving the basis of the prior home or homes for as long as you postpone your gains.
Especially if you plan to live in your home for many years, you should take care that your basis records are not lost, destroyed, or misplaced. You might wish to keep them in a safe deposit box with your other valuable records. Another alternative is to make digital copies of the records and store them online.
Whether you actually owe tax upon selling your home depends in part on the amount of the gain. If, for example, you're a single taxpayer who qualifies for the $250,000 home sale exclusion, your entire gain is tax free.
On the other hand, if your basis in a home is $400,00 and you sell it for $750,000, you'll realize a $350,000 gain on such a sale. Even with the $250,000 exclusion, $100,000 of your gain would still be taxable.
For more on the subject of figuring gain or loss and determining basis, see IRS Publication 523, Selling Your Home.
]]>Unfortunately, too many cottages and vacation homes go from happy idylls to combat zones, with forced sales, severed relationships, and an exasperated heir declaring to siblings: "I am tired of dealing with attorneys and all of you. I want out now!" Even in seemingly harmonious families, it is difficult to predict how siblings will relate to one another once the parents are not around to mediate disputes. And disputes do arise.
More than 80% of cottages and vacation homes are owned free and clear of mortgage debt, which means that a cottage or house often represents a substantial part of an owner's estate. To some heirs, the prospect of using the cottage is more desirable than its cash value. But heirs of modest means may be counting on their share of the value of the cottage to pay debts or put their kids through college. Stepchildren and spouses who did not grow up at the lake or seashore often have weak emotional ties to the cottage but strong interest in its cash value. All of this sets the stage for trouble. Having no plan for the family cottage, or even relying on a traditional estate plan, leaves families vulnerable to turmoil.
The difficulties of passing on a vacation cottage while keeping peace in the family aren't just legal; they're emotional and even sociological. (Getting everyone to agree on how property should be used and maintained is never easy.) But there is one key legal problem you must understand: Generally, any co-owner can force the sale of real estate.
Let's say you leave your cottage to your three children. Two of them are happy to use the cottage and work at keeping it in good shape. But one of them lives far away and can't spend his vacations at the cottage. His wife and children have no particular attachment to the place. After a few years, he decides he just can't afford his share of the expenses (maintenance and taxes) and doesn't really want to own the cottage anyway. He'd rather have his share of its value in cash, to pay for your grandchildren's college tuition.
He asks his siblings to buy him out. They would like to but just don't have the money. They offer what they can, but it's far less than the actual value of his share. They hate the thought of selling the place and think their brother should just let things stay as they are. What now? If the unhappy sibling is determined to get his money out, he can force a sale of the property -- in court, if necessary. That's true even though he owns only a one-third share; in this situation, the majority does not rule. A forced sale not only means the family property is gone, but also that family harmony is deeply damaged, perhaps beyond repair.
A good alternative to leaving your children a direct interest in cottage real estate is to create a limited liability company (LLC), a form of business entity similar to a corporation, to own the property. Then, instead of transferring interests in real estate to your children, you can transfer the membership interests in the LLC to them. As a result, your children's rights and obligations (and those of future owners) are governed by the LLC "operating agreement."
That agreement, a document you draw up, covers scheduling, contributions to expenses, permissible owners, renting, maintenance, and whether the property can be mortgaged. It prevents forced sales but allows for graceful exits. You'll need an attorney's help to draw it up, but you and family members can decide on the important matters after discussing them. Your cottage plan doesn't have to be perfect (and you can change it during your lifetime if you want to). But even a good-enough plan can prevent costly and bitter strife among your descendants. They will thank you for it.
Before leaving an interest in your cottage to a child, confirm that the child really wants it. This is not as obvious or simple as it sounds. You love the cottage -- if you didn't, you either would have sold it or made arrangements to sell it at your death. Your emotional ties to the cottage can blind you to the child's feelings about it. You may have a hard time understanding why your child might not want an interest in the cottage, even if it requires the child to make financial sacrifices (as you may have done) to acquire and keep it. Especially if you have a child who lives far away, doesn't have children to inherit a share in the place, or has financial difficulties, be sure to ask. The best course may be to leave that child other assets instead of a share of property that might feel more like a burden than a gift.
For more information on helping your family cottage and vacation home survive, including guidance on how to use it as a vacation rental and tips on minimizing your taxes, see Saving the Family Cottage: A Guide to Succession Planning for your Cottage, Cabin, Camp, or Vacation Home , by Stuart J. Hollander, Rose Hollander, and David S. Fry (Nolo).
]]>