Relay-Version: version B 2.10 5/3/83; site utzoo.UUCP Posting-Version: version B 2.10.1 6/24/83; site alice.UUCP Path: utzoo!linus!decvax!harpo!whuxlm!whuxl!houxm!mhuxt!mhuxr!ulysses!allegra!alice!ark From: ark@alice.UUCP (Andrew Koenig) Newsgroups: net.taxes Subject: Re: taxes & home purchase Message-ID: <4154@alice.UUCP> Date: Thu, 15-Aug-85 17:49:10 EDT Article-I.D.: alice.4154 Posted: Thu Aug 15 17:49:10 1985 Date-Received: Tue, 20-Aug-85 08:11:19 EDT References: <1793@bmcg.UUCP> Organization: Bell Labs, Murray Hill Lines: 58 Here is a summary of things I learned while buying my first house a little more than a year and a half ago. Of course, any or all of this may be out of date or incorrect. In general, you can deduct two kinds of house expenses: taxes and interest. The exact manner in which property taxes are handled depends on where you live, but the following is probably typical. We pay property taxes quarterly, with the bill for each quarter being due the beginning of the second month of the quarter. Thus taxes for January through March are due on February 1, and so on. Suppose you close a house on March 17. This means that the seller has paid property taxes through the end of March. You must therefore reimburse the seller for 15/90 of the taxes that the seller paid for that quarter, because you own the house for 15 of the 90 days in the first quarter (March 17 through March 31). That money is taxable income for the seller and is deducted from your income taxes for next year. (If you like, instead of thinking it as income for the seller, think of it as an amount the seller must subtract from the amount of tax payments HE deducts from his income taxes next year. Same thing.) This year, you will deduct the tax payments you make on May 1, August 1, and November 1, as well as the part you gave the seller at the closing. What about interest? There are three parts to consider: (1) "points", (2) fractional month adjustment, and (3) regular interest. Points are a part of the interest that you pre-pay. Their purpose is to account for the fact that there are quite a few costs associated with making a loan, so the bank wants to discourage people from refinancing without a very good reason. Because this charge is interest, it is generally deductible (but not always -- check with an accountant or laywer to make sure!) for a first mortgage. Banks like mortgages to be for an integral number of months, so when you close on March 17, the bank will probably give you a mortgage starting on April 1. At the closing, therefore, you will have to come up with some extra interest to cover the loan between March 17 and March 31. This will probably be 15/360 times the interest rate of the loan times the principal, and can be deducted as interest just like any other interest. Your first mortgage payment isn't due unti May 1. Payments will be due the first of each month thereafter. Thus, this year you can deduct payments you made on the first of May, June, July, August, September, October, November and December. You have to wait until next year to deduct the payment you made on January 1. The bank will probably insist on making your tax payments for you. To do this, they will add some amount onto your mortgage payment to go into an escrow fund, and then pay the taxes from the fund. It is important to realize that you cannot deduct the taxes until they are actually paid! Thus, at the end of the year, you will have paid the bank for two months worth of property taxes that are now sitting in the escrow fund. Since this money is still yours, you cannot deduct it from your income taxes.