December 2010

Owning a Home — What’s Deductible?

Home Acquisition Debt (an IRS Term)

An important IRS term is “home acquisition debt.” Any first or second mortgage used to buy, build, or improve your home is considered to be home acquisition debt.

Acquisition debt can be a first or second mortgage used to buy your home. If you get a second mortgage and use it all for home improvement, that is also considered acquisition debt. If you do a “rate and term” refinance and don’t get any “cash out” – since you are just refinancing your acquisition debt – that also can be considered acquisition debt.

For any of the above types of loans that aren’t “grandfathered” — you can still deduct all the interest — but only if your total mortgage debt does not exceed one million dollars. For married couples filing separately, the limit is $500,000 each.

It gets more complicated with refinances and second mortgages.

Home Equity Debt (another IRS Term)

The IRS has another term called “home equity debt.” Basically, this is any loan amount in excess of what was spent to purchase, build, or improve your home.

If you get “cash out” when refinancing your home, the amount in excess of your original loan amount is considered “home equity debt” – unless some of it was used for home improvement. Anything in excess of the home improvement cost is considered “home equity debt.”

For second mortgages, it works the same way – anything not used to improve the home is considered “home equity debt.”

For the interest to be fully deductible, home equity debt cannot exceed $100,000 and the total mortgage debt on the home must not exceed its value. This can create a problem for those using 125% loan-to-value second mortgages to consolidate debt. That portion of the loan amount that exceeds the value of your home is not tax deductible (unless you used it for home improvement).

Deducting Points When Refinancing

Points paid during refinancing must be deducted over the life of the loan. For a thirty-year loan, you divide the points by thirty and get to deduct that amount each year.

However, there is an exception.

If you did a “cash out” refinance and used some of the funds to improve your primary residence, a portion of the points are deductible in the year you paid them. That portion is related to how much of the loan was used for home improvement. If you obtained a $200,000 loan and $50,000 was used for home improvement, then one-fourth of the points are deductible in the year you obtained the loan.

Save your receipts.

Deducting Property Taxes

Most homeowners pay property taxes to a local, state or foreign government. In most cases, property taxes are deductible. They must be charged uniformly against all property in the jurisdiction and must be based on the assessed value.

Many states and counties also impose property taxes for local improvements to property, such as assessments for streets, sidewalks, and sewer lines. These taxes cannot be deducted. Local property taxes are deductible only if they are for maintenance or repair, or interest charges related to those benefits.

Impound Accounts

Many mortgages have impound or escrow accounts. The borrower’s payment exceeds the amount necessary to pay the principal and interest. The excess goes into an account used to pay property taxes, homeowner’s insurance and mortgage insurance.

When calculating your property tax deduction, don’t deduct what you pay into that account. Only deduct what is paid from the account to the taxing authority.

Limits on Deductions

You may be subject to a limit on some of your itemized deductions. For 2000, this limit applies if your adjusted gross income is more than $128,950, or $64,475 if you are married filing separately.

Certified Public Accountants

Whenever you reach a point where you begin itemizing deductions, it is best to have your tax returns prepared by a Certified Public Accountant. Internal Revenue Service rules and regulations can quickly become…confusing.

copyright 2000 by Terry Light and RealEstate ABC

Tax Deductions For Rental Property Owners

Common Income Sources
Rental Income
Money you receive for rent is generally considered taxable in the year you receive it, not when it was due or earned; therefore, you must include advance payments as income.

For example, suppose you rent out a house for $1,000 per month and you require that new tenants pay first and last months’ rent when they sign a lease. In this case, you’ll have to declare the $2,000 you received as income, even though a $1,000 of that $2,000 covers a period that might be several years in the future.

Tenant-Paid Expenses
Expenses your tenant pays for you are considered income. This would include, for instance, an emergency repair on a refrigerator a tenant has to have done while you are out of town. You can then deduct the repair payment as a rental expense.

Trade for Services
Your tenant might offer to trade his services in exchange for rent. However, you must include a fair market value of the services as income. As an example, if your tenant offers to paint the rental house in exchange for one month’s rent (valued at $1,000), you must include the $1,000 as income, even though you didn’t actually receive the money. However, you will be able to deduct the $1,000 as an expense.

Security deposits
Security deposits are not taxable when you receive them if the intent is to return this money to the tenant at the end of the lease. But what if your tenant does not live up to the lease terms?

For example, suppose that you collect a $500 security deposit and then your tenant moves out and leaves holes in the walls that cost $400 to repair. You can deduct that amount from the security deposit during the year that you return it. At that time, though, you must include the $400 that you used to repair the wall as income. You will also be able to show the $400 as a deductible expense.

Repairs Vs. Improvements
Rental property owners may assume that anything they do on their property is a deducible expense. Not so, according to the IRS.

A repair keeps your rental property in good condition and is a deductible expense in the year that you pay for it. Repairs include painting, fixing a broken toilet and replacing a faulty light switch. Improvements on the other hand, add value to your property and are not deductible when you pay for them. You must recover the cost of improvements by depreciating the expense over your property’s life expectancy. Improvements can include a new roof, patio or garage.

Therefore, from a tax standpoint, you should make repairs as the problems arise instead of waiting until they multiply and require renovations.

Common Deductions
Mortgage Expenses
Expenses to obtain a mortgage are not deductible when you pay them. These include commissions and appraisals. However, you can amortize them over the life of your mortgage.

Once you start making mortgage payments, remember that not all of the payment is deductible. Since part of each payment goes toward paying down the principal, this amount is not a deductible expense; the portion paid toward interest is deductible. Your mortgage company will send you a Form 1098 each year showing how much you’ve paid in interest throughout the year. This is deductible. Also, if a part of your payment includes money that goes into an escrow account to cover taxes and insurance, your mortgage company should report that to you as well.

Travel Expenses
Money you spend on travel to collect rent or maintain your rental property is deductible. However, if the purpose of the trip was for improvements, you must recover that expense as part of the improvement and its depreciation.

You have two choices on how to deduct travel expenses: the actual expenses or the standard mileage rate. You can read more about the IRS’s requirements and current mileage allowance in Publication 463.

Other Common Expenses
In addition to repairs and depreciation, some of the other common expenses you can deduct are:

• Insurance
• Taxes
• Lawn care
• Tax return preparation fee
• Losses from causalities (hurricane, earthquake, flood, etc.) or thefts

Condominiums and Cooperatives
If you own a rental condominium or cooperative, each has some special rules.

Condominiums
With a condominium you might pay dues or assessments to take care of commonly-owned property. This includes the building structure, lobbies, elevators and recreational areas.

When you rent out your condominium, you can deduct expenses, such as depreciation, repairs, interest and taxes that relate to the common property. However, just as with a single-family rental, you cannot deduct money spent on capital improvements, such an assessment for a cabana at the clubhouse. Instead you must depreciate your cost of any improvement over its life expectancy.

Cooperatives
Expenses you have for a cooperative apartment you rent out are deductible. This includes the maintenance fees paid to the cooperative housing corporation. Capital improvements are treated differently – you cannot deduct the cost of the improvement, nor can you depreciate it. You must add the cost of the improvement to your cost basis in the corporation’s stock. This will reduce your capital gain when you sell the apartment.

Keep Good Records
Under the IRS’s Schedule E there are spaces for numerous categories of expenses. Therefore, the IRS gives you flexibility in the items you can deduct. But be prepared to back up your claim, and be sure to break out expenses that are for repairs and maintenance from those that are capital improvements. Remember, money you spend on improvements could reduce your tax liability when you sell.

In addition, if you claim to be a real estate professional, you should keep supporting documentation (appointment books, diaries, calendars, logs, etc.) to prove your active participation and the time spent on your properties each year.

All in all, there are quite a few types of deductions available to real estate investors and it pays to know which ones you qualify for.

Holiday Pet Safety Checklist

You can help keep pets safe during the holiday season by following the tips below. For other important, timely tips for cold weather protection, traveling with pets and safety issues, as well as behavior guidance, go to www.paw-rescue.org and click the Dog Tips link.

* Many holiday plants can lead to health problems in dogs and cats. Among the plants to keep out of reach are holly, mistletoe, poinsettias and lilies.

* Snow globes often contain antifreeze, which is poisonous to pets.

* Pine needles, when ingested, can puncture holes in a pet’s intestine. So keep pet areas clear of pine needles.

* The extra cords and plugs of holiday lights and other fixtures can look like chew toys to pets. Tape down or cover cords to help avoid shocks, burns or other serious injuries. Unplug lights when you are not home.

* Anchor Christmas trees to the ceiling with a string to keep it from falling on pets.

* Do not let pets drink the holiday tree water. Some may contain fertilizers, and stagnant tree water can harbor bacteria. Check labels for tree water preservatives and artificial snow, and buy only those that are nontoxic. Some folks use screens around trees to block access to electrical cords and gifts.

Very important: do not put aspirin in the water (some folks do this thinking it will keep the tree or plant more vigorous). If a pet ingests the aspirin-laced water, his health or even life can be at risk.

* Pets, particularly cats, can be tempted to eat tinsel, which can block the intestines. Hang tinsel high and securely to keep it out of reach of pets.

* Keep other ornaments out of reach of pets. Ingestion of any ornament, which might look like toys to pets, can result in life-threatening emergencies. Even ornaments made from dried food can lead to ailments. And remember, shards from broken glass ornaments can injure paws, mouths and other parts of the body.

* Put away toys after children open their gifts. Small plastic pieces and rubber balls are common causes of choking and intestinal blockage in dogs. Ingested plastic or cloth toys must often be removed surgically.

* Avoid toxic decorations. Bubbling lights contain fluid that can be inhaled or ingested, snow sprays and snow flock can cause reactions when inhaled, styrofoam poses a choking hazard, tinsel can cause choking and intestinal obstruction, and water in snow scenes may contain toxic organisms such as Salmonella.

* Keep candles on high shelves. Use fireplace screens to avoid burns.

* Hi-tech shooing: A timely product Im not sure Id recommend, but if you have any experience with it, let me know. The StayAway canister from Contech Electronics uses a motion-detection device to sense when a pet approaches some off-limits area (countertop, table-top, candles, fireplace mantel, holiday tree), then activates a burst of compressed air and a one-second warning screech.

Other low-tech methods: place sticky mats, crunchy aluminum foil or bubblewrap on or around the area … tie balloons around the area … put some pennies in empty plastic drink bottles and balance the bottles on the bottom branches of the holiday tree or plant so that theyll noisily tip over if a cat or other pet jumps at or on the tree.

* Holiday guests and other activity can be very stressful and even frightening to pets. It can also trigger illness and intestinal upset. Make sure pets have a safe place to retreat in your house. And make sure they are wearing current I.D. in case they escape out a door when guests come and go.

* Reduce stress by keeping feeding and exercise on a regular schedule.

* Always make time to care for your pets. Some folks get lax about walking their dogs, and a few resort to letting pets out on their own. This puts the animal in danger, while also leading to nuisance complaints and dog bite incidents. Remind pet owners not to take a holiday from responsibly caring for their pets.

* When pets are stressed by holiday activity or during travel, they may require more water. Dogs typically pant more when they feel stressed. Keep fresh water available for them to drink.

* Rescue Remedy, a Bach flower essence available in most health food stores, is a natural stress reliever that many folks keep on hand at home and in travel kits. It can often help both people and animals recover from injury, fright, illness, travel fatigue, chocolate ingestion and irritation. Put a few drops in the dog�s water bowl or portable water container. For stressed or injured animals, rub a drop on their ear or put a drop on the towel in their crate or carrier. Flower essences are free of harmful effects and can be used along with conventional medicines. Another safe, nontoxic Rescue Remedy-like product is Animal Emergency Trauma Solution, available from www.greenhopeessences.com, where you can also get Flee Free to combat fleas nontoxically. Other flower essence sources include anaflora.com and perelandra-ltd.com.

* Do not let guests feed your pets human food. There are many holiday foods, including fatty meats, gravies, poultry skin, bones, chocolate and alcohol, that can cause illnesses from vomiting and diarrhea to highly serious pancreatitis and other toxic reactions. In addition, candy wrappers, aluminum foil pieces and ribbons can choke pets.

* Keep pets away from gift packages as well as your gift wrapping area. Ingested string, plastic, cloth and even wrapping paper can lead to intestinal blockage and require surgical removal. And pets have been severely injured by scissors and other items left on floors and tables.

* Keep pets away from the garbage. Use pet-proof containers.

* If you suspect that your pet has eaten something toxic, call your veterinarian and/or the ASPCA Animal Poison Control Center’s 24-hour emergency hotline at 1-888-4-ANI-HELP.

* If your pet ingests glass, broken plastic, staples orother small, sharp objects, call your veterinarian.
In the meantime, you can give your dog supplemental fiber in the form of whole wheat or other high-fiber bread, canned pumpkin or Metamucil, any of which can help bulk up the stools the help the foreigh material pass through the dogs digestive system. Dosages depend on the size of the dog. For Metamusil, try a teaspoon for a small dog, a tablespoon for a big dog. For pumpkin, feed one-quarter to two-thirds of a cup. Some folks recommend feeding the dog cotton balls to help pass the foreign objects, but others in the veterinary field caution against this since cotton balls can compound the problem.

* By the way, now is a good time to double-check smoke detectors, carbon monoxide detectors and other safety devices and replace batteries. Safety, of course, is the key reason — but here’s another good reason. When batteries run low, the devices often emit alert or alarm sounds at frequencies that can be painful and frightening to many pets. If you’re not home when the alert/alarm sounds, your animals will have to endure that sound until you return, which can be traumatic. So always keep fresh batteries in those devices.

2 Delicious Southern Holiday Pie Recipes: Pecan and Sweet Potato

Home baked pies are terrific treats any time of the year. For many families, baking pies is a holiday tradition. In the south, sweet potatoes and pecans are plentiful, and baking with them is considered an art form. Try adding one of these traditional Southern style homemade holiday pie recipes to your menu this year, and everyone in your family will thank you!

Southern Pecan Pie

Ingredients:

• 1/4 cup of butter
• 3/4 cup sugar
• 1 tablespoon of flour
• 11/2 cups of dark Karo syrup
• 1/8 teaspoon of salt
• 4 large eggs
• 1 cup of pecans, broken into pieces of varying sizes
• 1 teaspoon of vanilla
• 1 frozen pie crust

Directions:

Preheat oven to 350 degrees. With an electric mixer, cream the butter. Add the flour and sugar, and mix until the combination becomes fluffy. Add the Karo syrup and beat well. Add the eggs one at a time, beating well between each one. Mix in the salt, pecans, and vanilla. Pour mixture into the pie crust. Bake for 50 minutes. Allow to set for at least an hour before serving. Tastes great warm, at room temperature, or chilled. Refrigerate leftovers, if you have any.

Serving suggestion: Garnish with shredded coconut. Serve with hot chocolate, coffee, or another delicious warm holiday beverage.

Southern Sweet Potato Custard Pie

Ingredients:

• 2 cups mashed cooked sweet potatoes
• 1 cup whipping cream
• 1 cup milk
• 3 eggs, well beaten
• 1 cup brown sugar
• Juice from one lemon
• 1 teaspoon of cinnamon
• 2 tablespoons of butter
• 1 frozen pie crust

Directions:

(Note: this recipe is a great way to use up left over sweet potatoes, but if you don’t have any cooked sweet potatoes on hand to mash, simply boil, bake, or microwave them in preparation for making this tasty pie.)

Preheat oven to 350 degrees. Melt the butter. In a separate large bowl, beat the eggs. Once the eggs are well beaten, pour the butter and all remaining ingredients into the bowl with them and mix well. Pour into unbaked frozen pie crust. Bake for 45 minutes. Allow to sit for at least ten minutes before cutting. This traditional southern pie tastes great warm, hot, or chilled. Refrigerated any leftovers.

Variation: Instead of using fresh mashed sweet potatoes, you can use canned candied yams to prepare this recipe. Simply drain and mash 2 cups worth of canned yams. Reduce brown sugar to 3/4 of a cup because canned candied yams are pre-sweetened.

Serving suggestion: Top with whipped cream sprinkled with a little bit of cinnamon, and serve with a delicious cup of festive spiced hot tea.