Tax Implications From Joint Home Ownership

What is the name of your state? PA

My g/f and I will be purchasing a home in the upcoming weeks. I know there are certain tax advantages with Interest, some closing costs, and property taxes. The home will be in both of our names, but I will be making all of the payments for closing.

Question:
1. If we are able to benefit from itemizing, will the appropriate itemized items need to be split, or can just one of us take the deductions?

[Snipes5]

You can take all of it, just make sure you have proof that you made all the payments.

If you purchase property this year before December 31, it is unlikely that you will have enough to itemize this year. The only closing costs that you can use to itemize are points, also known as loan origination fees, and property taxes. A month or two of interest added onto that won't amount to much unless you're buying a property for $300,000 or more.

Snipes

Snipes -

Thank you! After reading on the IRS site last night, I realized that if I bought a house now, I'd be hard pressed to find enough deductions to make a true benefit. Maybe waiting til January would be wise! We have to prepay taxes for a year in our closing costs and then all that interest and years worth of taxes will really add up!

[abezon]

I don't think you need to put off buying a house until January. You can just take the standard deduction in 2004 & itemize in 2005. If you don't write off all the points in the purchase year, you can write them off over the course of the loan (30 years *or* until you refinance). In fact, if you buy in December & refi in January, you can write off 359/360ths of the points on your 2005 return. Also, when you move, you'll probably give away a bunch of stuff to Goodwill --be sure to keep an itemized list, as this is a charitable deduction. I suggest you make the actual donations in January 2005, since you won't be itemizing in 2004.

Another thing to consider: if unamrried people obtain a loan together, the full amount of the loan shows up on each person's credit report. If married people get a loan, 1/2 the amount shows up on each report. Thus, you might have just one person get the mortgage & take title to the house, then immediately have the new owner quitclaim 1/2 the house to the other person. Make sure adding someone to the title does not trigger the "due on sale clause" of the loan. Usually it doesn't.

This will also allow you to have just the person on the loan claim the mortgage interest & property taxes on schedule A; the other person can still claim the standard deduction for a single person.

I also strongly recommend you & your gf sit down & write out a basic agreement for buying the hosue, paying expenses, deciding what repairs to make, and what happens if you split up (flip a coin to see who gets to buy out whom, sell, etc). Don't break up over the agreement terms, but make sure you have something in writing. I guarantee if you break up in 5 years, neither of you will remember what you agreed to unless it's written down.

Congratulations on buying a home & good luck.

Prepay the January or February mortgage coupon. Then you can deduct those interest charges. Contact your mortgage company to make sure the interest shows up on your 2004 1099. Since PA real estate taxes are so high, see if you can deduct those too, assuming you pay these in escrow each month.

[abezon]

Originally Posted by ollie w. holmes

Prepay the January or February mortgage coupon. Then you can deduct those interest charges. Contact your mortgage company to make sure the interest shows up on your 2004 1099. Since PA real estate taxes are so high, see if you can deduct those too, assuming you pay these in escrow each month.

No, you cannot deduct prepaid interest. Interest on your home mortgage can only be deducted once it becomes due.

Originally Posted by abezon

No, you cannot deduct prepaid interest. Interest on your home mortgage can only be deducted once it becomes due.

This depends on the mortgage company. If a principal + interest payment is due on Jan 1, but you pay on Dec. 20, then in all likelihood your 1099 will include the interest payment you made before the end of the year. This is known as cash basis accounting. I did this during a mortgage switchover, and was credited as having paid interest in December (for the Jan. bill).

Until recently, you could also play all sorts of tricks with real estate taxes, paying bills 6 months in advance. This is handy when you are switching properties. You get a deduction in one year, a refund sometime later, and no one was the wiser.

[Snipes5]

From IRS Pub 936

Prepaid interest If you pay interest in advance for a period that goes beyond the end of the tax year, you must spread this interest over the tax years to which it applies. You can deduct in each year only the interest that qualifies as home mortgage interest for that year.

Really Ollie, why don't you help out the pot selling gambler aka "cheater". He could probably benefit from your 50 ways to weasel your way around the IRS. The rest of us don't care. People don't normally post here looking for creative ways to evade taxes.

Snipes

[abezon]

Originally Posted by ollie w. holmes

This depends on the mortgage company. If a principal + interest payment is due on Jan 1, but you pay on Dec. 20, then in all likelihood your 1099 will include the interest payment you made before the end of the year. This is known as cash basis accounting. I did this during a mortgage switchover, and was credited as having paid interest in December (for the Jan. bill).

Ollie, there's a difference between not getting caught & preparing your taxes correctly under the law. If you're going to deviate from the tax laws, you should at least do so intentionally, fully aware of the risks & possible consequences.