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This will be a long but VERY useful post since I find most people don’t know this information. I will divide it into two posts over two days.
For a principal residence, there are four types of things that can happen to expenses you incur when you buy a home: They can be added to basis, you might deduct some costs, some can be amortized over life of loan and some are plainly non-deductible and thus lost forever. YUCK!
1. All costs of obtaining title such as commissions, legal fees, title search and title policy costs and transfer taxes get added to basis.
2. Real estate tax prorations are deductible.
3. Costs incident to purchase are non-deductible and lost such as hazard insurance, condo fees and utility proration.
4. (This is a BIG one) Costs incident to a loan: Other than points, which are deductible, the rest of these are non-deductible: lender required legal fees, appraisal fees, mortgage broker’s commission,pest inspection, credit reports and mortgage insurance premiums. OUCH!
Sandy’s Hot Tip: Have the seller pay these non deductible costs and raise the price in the contract. At least you get an increase in basis for them.
This is all found in my course: “Wealth Building Tax Strategies for Real estate.”