Happy 2007! Can you believe
we're in a new year
already? The past year was a busy one in real estate for me. The last few weeks of Dec. I got a bit overwhelmed, I was a little brain dead. It was a busy couple of weeks, I had a couple of closings, Donna and I went to Miss. for Christmas (where we spent time with my entire family) and I got the flu when I got back. Anyway, feeling better now and looking forward to the new year. I hope all of you had a wonderful holiday and will have a
prosperous and joyous 2007. Here's some information for you homeowners that may be useful.
New Tax Law Gives Home Buyers a Break or TwoBy Benny L.
KassSaturday, December 23, 2006; F06
President Bush this week signed a law that includes almost 200 tax changes, at least two of which are potential money savers for home buyers.
First-time D.C. home buyers: If you are buying your first home in the District, and it will be your principal residence, you may be eligible for a credit against your federal taxes of up to $5,000. It makes no difference if you have owned -- or still own -- property anywhere else. The law defines "first-time home buyer" to mean "any individual if such individual (and if married, such
individual's spouse) had no present ownership interest in a principal residence in the District of Columbia during the one-year period ending on the date of the purchase of the principal residence to which this section applies."
Thus, even if you owned a house in the District several years ago, as long as you did not own any property in the city for at least one year before purchasing a new one, you could be eligible for the tax credit.
If this sounds familiar, it is. It dates back to a law enacted in 1997, which expired Dec. 31, 2005. However, Congress reinstated the law, retroactive to Jan. 1, 2006. It will expire again on Dec. 31, 2007.
Economists and real estate professionals have called the exemption a key factor in the housing boom in the District over the past several years. Del. Eleanor Holmes Norton (D-D.C.), who pushed the measure in Congress, said: "Even in today's cooling housing market, home prices are out of reach for many D.C. residents. The $5,000 home buyer credit is desperately necessary in this town today."
A tax credit is different from a tax deduction, and more generous. It reduces the amount of tax you owe by the amount of the credit, dollar for dollar.
There are no restrictions on the amount of the purchase price, nor on the location of the property in the District. There are, however, income limits that phase out the credit for higher-income buyers.
? Joint tax filers get the full credit until their modified adjusted gross income reaches $110,000. Then for every $1,000 of
AGI above this number, the credit is reduced by $250. Once the
AGI exceeds $130,000, no credit is available.
? Single tax filers get the full credit until their modified
AGI reaches $70,000. Then, for every $1,000 of
AGI above this number, the credit is reduced by $250. Once your
AGI exceeds $90,000, no credit is available.
Although the concept is simple, the law is complex. Congress wanted to continue to encourage taxpayers to move into the District and purchase homes. If you are planning to buy a house soon, consult your tax and legal advisers before signing that purchase and sales agreement.
It is important to note that the law is retroactive to Jan. 1, 2006. So if you purchased a house, condominium or cooperative apartment this year, you can take advantage of the credit when you file your income tax forms next year.
You should obtain IRS form 8859, "District of Columbia First-Time
Homebuyer Credit" which is available online from the Internal Revenue Service (
http://www.irs.gov/; click on Forms and Publications).
Deducting private mortgage insurance premium payments: When you make mortgage payments to your lender, the law allows you to deduct the portion of your payment that is interest. For many years, a number of legal scholars have been arguing that payments for private mortgage insurance should also be deductible.
But the IRS took the position that payments to a private mortgage insurance company are not interest and accordingly disallowed any such deductions.
The new law -- as least for mortgage insurance issued next year -- allows such deductions.
What is private mortgage insurance? Don't confuse
PMI with
homeowner's or hazard insurance, which protects homeowners in the event of loss, such as from fire or theft.
PMI protects the lender against financial loss if the homeowner defaults on mortgage payments and the house has to be sold at foreclosure.
For example, if your house has a loan of $250,000, but at foreclosure sells for only $200,000,
PMI will pay the lender part of the difference.
You, the homeowner, pay the premiums. You generally have no choice if you do not put down at least 20 percent of the purchase price. (To avoid
PMI, many home buyers obtain what is called an 80-10-10 loan. In other words, you get a first trust of 80 percent of the price, a second trust of 10 percent and pay the remaining 10 percent yourself. The second trust is at a higher interest rate than the first.)
Lenders have learned that if you have less than 20 percent equity in your house, you are more likely to default on your mortgage. Statistics are starting to show a significant number of foreclosures, especially for home buyers who obtained "100 percent, no money down" loans.
The new law trumps IRS
rulemaking to allow deduction of
PMI payments. But the law is limited. First, it does not apply to existing mortgages; it covers only
PMI policies that will be issued during 2007. Second, the deduction is not available for single filers who make more than $50,000, or for joint filers whose income is more than $100,000.
Benny L. Kass is a Washington lawyer. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed stamped envelope to Benny L. Kass, Suite 1100, 1050 17th St. NW, Washington, D.C. 20036. Readers may also send questions to him at that address.
