Financial Guides Archive - Page 7 of 11 - Private Tax Solutions

If you moved due to a change in your job or business location, or because you started a new job or business, you may be able to deduct your reasonable moving expenses; however, you may not deduct any expenses for meals. If you meet the requirements of the tax law for the deduction of moving expenses, you can deduct allowable expenses for a move to the area of a new main job location within the United States or its possessions. Your move may be from one United States location to another or from a foreign country to the United States.

The rules applicable to moving within or to the United States are different from the rules that apply to moves outside the United States. These rules are discussed separately.

To qualify for the moving expense deduction, you must satisfy three requirements.

Under the first requirement, your move must closely relate to the start of work. Generally, you can consider moving expenses within one year of the date you first report to work at a new job location. Additional rules apply to this requirement. Please contact us if you need assistance understanding this requirement.

The second requirement is the “distance test;” your new workplace must be at least 50 miles farther from your old home than your old job location was from your old home. For example, if your old main job location was 12 miles from your former home, your new main job location must be at least 62 miles from that former home. If you had no previous workplace, your new job location must be at least 50 miles from your old home.

The third requirement is the “time test.” If you are an employee, you must work full-time for at least 39 weeks during the first 12 months immediately following your arrival in the general area of your new job location. If you are self-employed, you must work full-time for at least 39 weeks during the first 12 months and for a total of at least 78 weeks during the first 24 months immediately following your arrival in the general area of your new work location. There are exceptions to the time test in case of death, disability, and involuntary separation, among other things. And, if your income tax return is due before you have satisfied this requirement, you can still deduct your allowable moving expenses if you expect to meet the time test.

If you are a member of the armed forces and your move was due to a military order and permanent change of station, you do not have to satisfy the “distance or time tests.”

You can deduct only those expenses that are reasonable under the circumstances of your move. For example, the cost of traveling from your former home to your new one should be by the shortest, most direct route available by conventional transportation. If during your trip to your new home, you make side trips for sightseeing, the additional expenses for your side trips are not deductible as moving expenses.

Nondeductible expenses. You cannot deduct as moving expenses any part of the purchase price of your new home, the costs of buying or selling a home, or the cost of entering into or breaking a lease. Don’t hesitate to call if you have any questions about which expenses are deductible.

Reimbursed expenses. If your employer reimburses you for the costs of a move for which you took a deduction, you may have to include the reimbursement as income on your tax return.

If you use your car to take yourself, members of your household or your personal effects to your new home, you can figure your expenses by deducting either:

1. Your actual expenses, such as gas and oil for your car, if you keep an accurate record of each expense, or
2. The standard mileage rate is 18 cents per mile for miles driven during 2018 (17 cents per mile in 2017).

If you choose the standard mileage rate you can deduct parking fees and tolls you pay in moving. You cannot deduct any general repairs, general maintenance, insurance, or depreciation for your car.

You can deduct moving expenses you pay for yourself and members of your household. A member of your household is anyone who has both your former and new home as his or her home. It does not include a tenant or employee unless you can claim that person as a dependent.

If you meet the requirements of the tax law for the deduction of moving expenses, you can deduct allowable expenses for a move to the area of a new main job location within the United States or its possessions. Your move may be from one United States location to another or from a foreign country to the United States.

Household goods and personal effects. You can deduct the cost of packing, crating, and transporting your household goods and personal effects and those of the members of your household from your former home to your new home. If you use your own car to move your things, compute the deduction under the rule discussed above under “Travel by Car.”

You can include the cost of storing and insuring household goods and personal effects within any period of 30 consecutive days after the day your things are moved from your former home and before they are delivered to your new home.

You can deduct any costs of connecting or disconnecting utilities due to the moving your household goods, appliances, or personal effects.

You can deduct the cost of shipping your car and your pets to your new home.

You can deduct the cost of moving your household goods and personal effects from a place other than your former home. Your deduction is limited to the amount it would have cost to move them from your former home.

Paul Brown is a resident of North Carolina and has been working there for the last four years. Because of the small size of his apartment, he stored some of his furniture in Georgia with his parents. Paul got a job in Washington, DC. It cost him $300 to move his furniture from North Carolina to Washington and $1,100 to move his furniture from Georgia to Washington; however, if Paul had shipped his furniture in Georgia from North Carolina (his former home), it would have cost him $600. He can deduct only $600 of the $1,100 he paid. He can deduct $900 ($300 + $600).

You cannot deduct the cost of moving furniture you buy on the way to your new home.

Travel expenses. You can deduct the cost of transportation and lodging for yourself and members of your household while traveling from your former home to your new home. This includes expenses for the day you arrive. You can include any lodging expenses you had in the area of your former home within one day after you could not live in your former home because your furniture had been moved. You can deduct expenses for only one trip to your new home for yourself and members of your household. However, all of you do not have to travel together. If you use your own car, calculate your deduction as explained under Travel by Car, earlier.

To deduct allowable expenses for a move outside the United States, you must be a United States citizen or resident alien who moves to the area of a new place of work outside the United States or its possessions. You must meet the requirements of the tax law for deducting moving expenses.

In addition to the expenses discussed earlier, the following may be deductible for moves outside the United States.

Storage expenses. You can deduct the reasonable expenses of moving your personal effects to and from storage. You can also deduct the reasonable expenses of storing your personal effects for all or part of the time the new job location remains your main job location. The new job location must be outside the United States.

Moving expenses allocable to excluded foreign income. If you live and work outside the United States, you may be able to exclude from income part of the income you earn in the foreign country. You may also be able to claim a foreign housing exclusion or deduction. If you claim the foreign earned income or foreign housing exclusions, you cannot deduct the part of your allowable moving expenses that relates to the excluded income.

To find a good real estate agent, gather a list of names of candidates you will interview. You may want to consider recommendations from colleagues, friends, and professionals, as well as names listed on posted “for sale” signs, especially for houses that have been sold. Once you have at least three names, schedule a telephone or in-person interview with the agent. You may encounter some resistance; if you run into a broker who refuses to take the time to answer your questions, just move to the next one.

Tip: Although a popular practice in recent times (due to the savings on commissions paid to a broker), selling your own home without a broker is often more difficult unless you have a buyer in mind.

Be sure to ask potential agents the following:

• What problems do you see in marketing our home? (The broker should be honest about potential problems in selling the home and able to think creatively about solutions.)
• What would your plan be for marketing our home? What can we do to help you implement your plan? Listen carefully to the answer to find out whether the agent exhibits a willingness to think creatively in approaching whatever problems might exist with the selling process and whether he or she has a cooperative attitude.
• Will you include any ideas you have for selling the home in a listing agreement if we decide to sign with you?
• Where do you live? (You want a broker who lives nearby, who knows the good and bad points about your area.)
• How much is your commission? (The average commission is 6 or 7 percent. Although brokers sometimes take a cut in their commissions during the negotiation process in order to move a sale along there is no point in trying to bargain down a broker’s commission at this point.)
• Do you have a list of comparable homes? (Such a list is essential in helping you arrive at an asking price for your home.)

The listing agreement is a contract between the homeowners and the agent. It states how much the agent will be paid and what services will be provided.

An exclusive right-to-sell type of agreement gives the broker the exclusive right to sell your house for a limited period of time. Other types of listing agreements vary either the exclusivity or time period of the listing. No matter which of these agreements are signed, the listing agent gets 100 percent of the commission if he or she sells the house and part of the commission if another broker sells the house.

Tip: Generally, try to limit an exclusive-right-to-sell agreement to a period of three months. This agreement will give the broker an incentive to sell the home, and it will still give you an out if you feel the broker is not doing enough for you. If you have substantial confidence in the broker, and you have seen and approved his or her plans for marketing the home, you may wish to sign a six month contract.

Tip: If, at any time during the marketing process, you feel that your broker is not as effective as he or she could be, switch brokers. Do not waste time with a broker you have doubts about.

There are various things you can do before and during the selling process to move it along and make it less onerous. A good real estate agent may suggest the following:

• Make cosmetic improvements to get the house looking as good as possible. For instance, patch damaged plaster and drywall, repaint, and re-wallpaper. Spruce up the exterior by replacing broken shingles or shutters or doing some minor landscaping to give your home more “curb appeal”.
• Increase your home’s appeal to a wider range of potential buyers. Repair or replace any part of your home that’s been modified that might not appeal to the general population.
• Make your home cozy and inviting when potentials buyers come by. Make sure the interior and exterior are clean, neat, and well maintained. Have a fire burning in the fireplace, bake some cookies or an apple pie, or have a pot of coffee brewing. Put away toys and tools. Keep pets out of sight. Not everyone is as enamored of Fido as your family is. Try not to cook foods like fish with lingering odors.
• Here are some ideas for working with your broker to speed up the sale of your home.
• Offer a warranty. Sometimes offering a warranty on the roof, electrical system or appliances can speed up a sale or smooth the negotiating process, particularly if it’s causing buyers to balk at the asking price.
• Create a home sale kit with your broker. A home sale kit consists of flyers that are distributed to potential home buyers and contain photos of your home’s exterior, interior, and surroundings. The sales flyer should also list major selling points and include information about utility costs, taxes, and a floor plan.
• Do not help the broker show the home. Allow the broker to do his or her job. Make yourself available for questions, but do not try to help sell to potential buyers who are looking at your home.
• Offer a bonus to your broker. A bonus shouldn’t be obvious to the buyer because the buyer will wonder if the house price has been bumped up to accommodate the real estate broker’s bonus. Instead, offer the bonus in the form of an increased commission, say 3.5 percent instead of 3 percent.
• Take it off the market and re-list it later. If your house has been on the market for a long time, it may be perceived as undesirable. Taking it off the market and re-listing it at a later time sometimes helps.

Although it is the broker’s job to do the actual negotiating, the homeowners should stay involved in the process. Here are some tips for negotiating with buyers, once they have made their first offer.

• Find out as much as possible about the potential buyer. Try to find out, for example, whether the buyer needs to buy a home quickly or is in a position to take plenty of time to negotiate. This will help you to decide what type of negotiating stance to take. Knowing details about the buyer’s family will help you point out how your home accommodates their needs. And, if you know that a buyer lives in an apartment and will need to buy appliances for their new home, then you can throw in deal sweeteners such as refrigerators, washer and dryers, and furnishings.
• On the flip side, try to reveal as little as possible about your own situation.

One final piece of advice is to avoid being confrontational, which can kill a potential deal during the negotiation process. The offers you receive will likely be 10 to 15 percent below your asking price. Do not be offended by this or by any “low-balling” techniques engaged in by buyers. Be willing to make some concessions. Make counter-offers and try to bring the offer closer to your asking price. If you feel that an offer is unreasonable, however, you can always reject it outright and wait for another buyer.

Once you have signed the contracts, it is time to start planning the move. The closing date, which is generally your moving date, will fall about two months after the contracts are signed.

Hiring A Moving Company

One thing you should do immediately after the contracts are signed even though your moving date may be months away is to begin calling moving companies. Try to get recommendations from friends or colleagues. Call a number of movers for estimates. You will have to provide them with the number of miles involved in the move and the approximate weight of your belongings. The mover will help you in making this estimate. Do not use a mover whose estimate seems too low. The services provided may be second-rate. You get what you pay for!

Ask in advance about extra charges for heavy items, stairways, or pianos. Be aware that having the movers pack for you will increase your moving bill by about 30 percent. Also, you may pay a premium if you schedule your move during busy moving times, generally after the 25th of the month or before the 2nd.

Right after you have scheduled your move, start taking care of the following items:

• Start throwing away things you don’t want to bring with you.
• Decide which items you are leaving behind for the new owners, and tag them appropriately.
• If your move is job-related, ask whether your employer will reimburse you for part of the cost. Save any receipts relating to the move, since part of the cost will be deductible.
• Start shopping for a new bank in your new neighborhood. Open a checking account once you have found one with competitive fees and convenient branches.
• Get a change of address kit from the post office, and start notifying everyone of your impending change. Note that you will need to follow any instructions given by credit card companies, banks, and other institutions that are affected by a change of address; sending them a change-of-address card will generally not be effective.
• Call the schools in the new area to enroll your children.
• Obtain enough packing supplies from your mover, and begin packing, unless the mover will be doing the packing for you.
• Get copies of your medical and dental records (and veterinary records), so you can hand these to your new doctors after you move.
• Be sure your move is covered by insurance: either the moving company’s insurance or your homeowner’s insurance. Call your insurance company to determine whether the move is covered. Also, take care of transferring your homeowner’s insurance to the new home.

Then, as you get closer to the date of your move, take care of the following:

• Call the utility companies and tell them to turn on service in the new place. Schedule a date when they will terminate service in the old place.
• Pack your belongings in boxes. Mark each box with its intended location in the new home, and with a summary of its contents. When you are close to moving day, pack a separate bag with items you will need right away, such as medications, toiletries, and clothing.
• Switch your direct payroll deposit, and any automatic payments, to your new checking account. You will have to fill out a form to accomplish this. Two or three days before you move, take the money out of your old account and transfer it to your new account.

Tip: Leave the old account open until all outstanding checks have cleared. To avoid fees, you may need to leave in any minimum balance required. Be sure to leave your new address with the old bank.

• If you are moving into an apartment building, discuss your moving plans with the landlord and make any necessary arrangements.
• Shop for auto insurance in the new area (if moving out of state).
• Confirm with the moving company. Write down directions to your new home.
• Transfer your brokerage account to your new area.
• Take valuables out of a safe deposit box and return the keys to the bank.
• Obtain travelers’ checks to cover the expenses of your move, and a cashier’s check to pay the mover (unless they will accept a personal check).
• Defrost your refrigerator.
• Leave a mail-forwarding order with the Post Office.
• On moving day, check your contract with the mover. Be sure the total cost of the move is clearly detailed. Make sure the moving date, location, and insurance information are correct.

Here is a list of people you should notify when you change your address and phone number. Although the list is not all-inclusive, it can be used as a starting point. You may need to notify these parties at both your old and new locations. Bear in mind that you may need to follow the instructions provided by banks, utilities, and credit card companies in order to effectively change your address. For instance, a phoned-in address change may not become effective with a lender if the lender’s policy is to require written address changes.

• The IRS (use Form 8822) and state and local taxing authorities
• The U.S. Post Office
• Home, auto, and life Insurance agents
• Debtors and creditors, such as mortgage holders, car lien holders, other lenders, and people who owe you money
• Credit card companies
• Publications
• Clubs and services to which you subscribe such as auto clubs, lawn mowing services, cleaning services, and book clubs
• The Social Security Administration
• Any organization that periodically mails you a check, such as a pension check or veterans’ benefits
• Banks
• Employers
• Doctors, dentists, veterinarians
• Motor vehicle departments
• Places of worship and non-profit agencies you are involved with
• The registrar of voters
• Utilities, telephone service, answering service, and trash collectors
• Your professional advisors

Your responsibilities do not end with the sale of the old home and the move to the new one. There are tax consequences, often complex, that need to be considered. How much is the gain? How much of it is taxable? How can you minimize the tax impact? Here, professional guidance is important.

When looking for a real estate agent, you may come across the following commonly used titles. Here is a basic definition of each:

• Principal broker: This is a person who is licensed to operate a real estate office. He or she may either work alone or employ other agents. Several years of experience are required to obtain this licensure. Anyone selling real estate must work under the supervision of a principal broker.
• Realtor: A realtor is a member of the National Association of Realtors, along with a state realtors’ association and a local board of realtors. Realtors are bound by a code of ethics. They are able to access a local computerized database of homes for sale known as the multiple listing service (MLS).
• Agent: This is the general term for any licensed professional in the real estate sales business.
• Listing agent: A type of agent who signs up the home seller and lists the home with the multiple listing service.
• Selling agent: An agent who finds a home for sale (through the multiple listing service) and finds a buyer for it.
• Buyer’s agent: The buyer’s agent is employed by the broker selected by the buyer.

Note: On a home sale, the listing agent and the selling agent split the commission with each other and with their principal brokers.

The following improvements and additions may increase the resale value of your home. Of course, bear in mind that the value home buyers place on various improvements will vary regionally, and even from neighborhood to neighborhood. But the list might serve to give you some ideas.

• Family room
• Fireplace
• Dining room
• Linen closet
• Garbage disposal
• Wall-to-wall carpeting
• Smoke detector
• Two-sink vanity (bathroom)
• Double-glass windows
• Range hood and fan
• Bathroom dressing area
• Patio
• New, stronger locks
• Central air
• Guest room
• Bathroom exhaust fan

For a discussion of the deductibility of points, please click here.

Generally, home mortgage interest is any interest you pay on a loan that is secured by your main home or by a second home. The loan may be a mortgage to buy your home, a second mortgage, a line of credit, or a home equity loan.

You can deduct home mortgage interest as an itemized deduction only if you are legally liable for the loan. In other words, you cannot deduct payments you make for someone else if you are not legally liable to make them. Further, there must be a true debtor-creditor relationship between you and the lender.

And, finally, the mortgage must be a “secured debt” on a “qualified home.” These two terms are explained later.

In most cases, you can deduct all of your home mortgage interest. Whether it is all deductible depends on the date you took out the mortgage, the amount of the mortgage, and your use of the mortgage proceeds.

If all of your mortgages fit into at least one of the following three categories at all times during the year, you can deduct all of the interest on those mortgages. If one or more of your mortgages does not fit into any of these categories, you may be able to deduct part of the interest. The three categories are:

• A mortgage you took out on or before October 13, 1987 (grandfathered debt).
• A mortgage taken out after October 13, 1987, to buy, build, or improve your home (called home acquisition debt) but only if throughout the year these mortgages plus any grandfathered debt totaled $1 million or less. The limit is $500,000 if you’re married filing separately. Starting in 2018 (and extending through tax year 2025), the interest deduction is allowed for amounts up to $750,000 (previously $1 million) for married filers ($375,000 for married filing separate) in mortgage principal on homes. Existing mortgages are grandfathered in and homes entered into contract before December 15, 2017, and that are closed on by April 1, 2018, are able to use the prior limit of $1 million.
• Home equity debt other than home acquisition debt taken out after October 13, 1987, up to a total of $100,000. The limit is $50,000 if you’re married filing separately. Home equity debt other than home acquisition debt is further limited to your home’s fair market value reduced by the grandfathered debt and home acquisition debt.

  Under the TCJA of 2017, to take the interest deduction, the loan must be used to buy, build or substantially improve the taxpayer’s home that secures the loan.

The dollar limits for the second and third categories apply to the combined mortgages on your main home and second home.

You can deduct home mortgage interest only if your mortgage is a secured debt. A secured debt is one in which you sign an instrument (such as a mortgage, deed of trust, or land contract) that:

1. Makes your ownership in a “qualified home” security for payment of the debt,
2. Provides, in case of default, that your home can be used to satisfy the debt, and
3. Is recorded or is otherwise perfected under any state or local law that applies.

In other words, your mortgage is a secured debt if you put your home up as collateral to protect the interests of the lender. If you cannot pay the debt, your home can then serve as payment to the lender to satisfy the debt.

A debt is not secured by your home if it is secured solely because of a lien on your general assets or if it is a security interest that attaches to the property without your consent (such as a mechanic’s lien or judgment lien).

A debt is not secured by your home if it once was, but is no longer secured by your home.

A wraparound mortgage is not a secured debt unless it is recorded or otherwise perfected under state law.

Beth owns a home subject to a mortgage of $40,000. She sells the home for $100,000 to John, who takes it subject to the $40,000 mortgage. Beth continues to make the payments on the $40,000 note. John pays $10,000 down and gives Beth a $90,000 note secured by a wraparound mortgage on the home. Beth does not record or otherwise perfect the $90,000 mortgage under the state law that applies. Therefore, that mortgage is not a secured debt, and the interest John pays on it is not deductible as home mortgage interest.

To deduct home mortgage interest, the debt must be secured by a qualified home. This means your main home or your second home, but not a third home except as described below under “More than one second home.” A home is defined as a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities.

The interest you pay on a mortgage on a home other than your main or second home may be deductible if the proceeds of the loan were used for business, investment, or other deductible purposes. Otherwise, it is considered personal interest and is not deductible.

Main home. You can have only one main home at any one time. Generally, this is the home where you spend most of your time.

Second home. A second home is a home that you choose to treat as your second home.

Second home not rented out. If you have a second home that you do not hold out for rent or resale to others at any time during the year, you can treat it as a qualified home. You do not have to use the home during the year.

Second home rented out. If you have a second home and rent it out part of the year, you also must use it as a home during the year for it to be a qualified home. You must use this home more than 14 days or more than 10 percent of the number of days during the year that the home is rented at a fair rental, whichever is longer. If you do not use the home long enough, it is considered rental property and not a second home.

More than one second home. If you have more than one second home, you can treat only one as the qualified second home during any year. However, you can change the home you treat as a second home in the following three situations.

1. If you get a new home during the year, you can choose to treat the new home as your second home as of the day you buy it.
2. If your main home no longer qualifies as your main home, you can choose to treat it as your second home as of the day you stop using it as your main home.
3. If your second home is sold during the year or becomes your main home, you can choose a new second home as of the day you sell the old one or begin using it as your main home.

The only part of your home that is considered a qualified home is the part of your home that you use for residential living. If you use part of your home for other than residential living, such as for a home office, you must allocate the use of your home. You must then divide both the cost and fair market value of your home between the part that is a qualified home and the part that is not. These calculations may reduce or even negate your deduction.

Renting out part of home. If you rent out part of a qualified home to another person (tenant), you can treat the rented part as being used by you for residential living only if all three of the following conditions apply.

1. The rented part of your home is used by the tenant primarily for residential living.
2. The rented part of your home is not a self-contained residential unit having separate sleeping, cooking, and toilet facilities.
3. You do not rent (directly or by sublease) the same or different parts of your home to more than two tenants at any time during the tax year. If two persons (and dependents of either) share the same sleeping quarters, they are treated as one tenant.

Office in home. If you have an office in your home that you use in your business, you may be entitled to deductions for the business use of your home, including the business part of your home mortgage interest.

You can treat a home under construction as a qualified home for up to 24 months, but only if it becomes your qualified home at the time it is ready for occupancy.

The 24-month period can start at any time on or after the day construction begins.

You may be able to continue treating your home as a qualified home even after it is destroyed in a fire, storm, tornado, earthquake, or other casualty. This means you can continue to deduct the interest you pay on your home mortgage, subject to the limits described in this guide.

You can continue treating a destroyed home as a qualified home if, within a reasonable period of time after the home is destroyed, you:

1. Rebuild the destroyed home and move into it, or
2. Sell the land on which the home was located.

This rule applies to your main home and to a second home that you treat as a qualified home. It also applies whether or not your home is in a federal disaster area.

You can treat a home you own under a time-sharing plan as a qualified home if it meets all the tests for a qualified home. If you rent out your timeshare, it qualifies as a second home only if you also use it as a home. To know whether you meet that requirement, count your days of use and rental of the home only during the time you have a right to use it or to receive any benefits from the rental of it.

If you are married and file a joint return, your qualified home(s) can be owned either jointly or by only one spouse.

If you are married filing separately and you and your spouse own more than one home, you can each take into account only one home as a qualified home. However, if you both consent in writing, then one spouse can take both the main home and a second home into account.

If a divorce or separation agreement requires you or your spouse or former spouse to pay home mortgage interest on a home owned by both of you, the payment of interest may be alimony.

This section describes certain items that can be included as home mortgage interest and others that cannot. It also describes certain special situations that may affect your deduction.

Late payment charge on mortgage payment. You can deduct as home mortgage interest a late payment charge if it was not for a specific service in connection with your mortgage loan.

Mortgage prepayment penalty. If you pay off your home mortgage early, you may have to pay a penalty. You can deduct that penalty as home mortgage interest provided the penalty is not for a specific service performed or cost incurred in connection with your mortgage loan.

Sale of home. If you sell your home, you can deduct your home mortgage interest (subject to any limits that apply) paid up to, but not including, the date of the sale.

John and Peggy Harris sold their home on May 7. Through April 30, they made home mortgage interest payments of $1,220. The settlement sheet for the sale of the home showed $50 interest for a 6-day period in May up to, but not including, the date of sale. Their mortgage interest deduction is $1,270 ($1,220 + $50).

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. However, there is an exception for points.

Mortgage interest credit. You may be able to claim a mortgage interest credit if you were issued a mortgage credit certificate (MCC) by a state or local government. If you take this credit, you must reduce your mortgage interest deduction by the amount of the credit.

Ministers’ and military housing allowance. If you are a minister or a member of the uniformed services and receive a housing allowance that is not taxable, you can still deduct your home mortgage interest.

Mortgage assistance payments. If you qualify for mortgage assistance payments under section 235 of the National Housing Act, part or all of the interest on your mortgage may be paid for you. You cannot deduct the interest that is paid for you.

Rental payments before real estate closing occurs. If you live in a house before final settlement on the purchase, any payments you make for that period are rent and not interest, and therefore not deductible. This is true even if the settlement papers call them interest.

Mortgage proceeds invested in tax-exempt securities. You cannot deduct the home mortgage interest on debt used to buy securities or certificates that produce tax-free income.

Refunds of interest. If you receive a refund of interest in the same year you paid it, you must reduce your interest expense by the amount refunded to you. If you receive a refund of interest deducted in an earlier year, you generally must include the refund in income in the year you receive it. However, you need to include it only up to the amount of the deduction that reduced your tax in the earlier year. This is true whether the interest overcharge was refunded to you or was used to reduce the outstanding principal on your mortgage.

If you paid $600 or more of mortgage interest (including certain points) during the year, you will usually receive IRS Form 1098, Mortgage Interest Statement (Info Copy Only) from the mortgage holder, showing the amount of interest you paid.

You should receive the statement for each year by January 31 of the following year. A copy of this form is also sent to the IRS.

Before deciding on the price range of the home you plan to buy, think about how much you want to pay out each month in mortgage payments. Use a mortgage calculator (online) to figure out what your payments would be, and try to make as large a down payment as possible to reduce your principal loan amount.

The Mortgage Payment

A mortgage payment consists of the mortgage loan payment (principal and interest), property taxes (in most cases), and homeowner’s insurance. It might also include private mortgage insurance if your down payment is less than 20 percent.

To get an estimate of the maximum mortgage amount, ask a real estate agent to help you get “pre-qualified” by a lender.

When deciding how much to borrow, be sure to take into account saving for your retirement, your financial goals, and your current lifestyle. Buying that particular home may not make financial sense if your monthly payments do not allow you to meet these needs.

The lender will set a maximum on how much you can borrow, but you use the maximum only as a starting point in deciding how much you will borrow. To avoid having your dream home turn into a nightmare, calculate how much you realistically can spend on the monthly mortgage payment. Do not forget to add in the real estate taxes and mortgage insurance.

Lenders will be happy to pre-qualify you by giving you a preliminary limit on the amount they would be willing to lend you. This pre-qualification is not a commitment on the lender’s part; lenders will not commit to a mortgage until they have the property appraisal and all of your supporting documentation, but the maximum loan amount they are willing to offer can be helpful for planning purposes.

The maximum debt is based on your income and debt level. It depends on current interest rates, the term of the mortgage, and the property taxes. Generally, the rule of thumb is that the maximum debt amount is usually about three times your annual gross income.

The Purchase Price

Having decided how much of a monthly mortgage payment you can realistically afford, you are now ready to set a price range for your new home. Give this range to potential real estate agents during your first visit, or use it to rule out homes that are out of your price range.

Planning Aid: See the Financial Calculator: How much house can I qualify for?

The Down Payment

Try to make as large a down payment as possible. There are two reasons for this: (1) lenders will generally not require you to pay for private mortgage insurance if you can come up with a 20 percent down payment, and (2) the sooner you pay off your mortgage, the better off you will be financially.

To save the 20 percent down payment, you may need to go on an “austerity plan” for a year or two. Many home buyers also use cash gifts or loans from family members to meet the 20 percent figure. If you cannot save 20 percent of the purchase price, you will still be able to get financing.

You can save time and trouble by knowing what to look for in a real estate agent. If your real estate agent is not doing their best to find you the home you want or is otherwise not meeting your expectations, don’t hesitate to make a change. Avoid staying in the relationship because you have invested time in it. Rather, get out as soon as you can. The real estate agent will cost you money, so make sure you are getting your money’s worth.

You can shop for and buy a home without an agent, but you will need to put in much extra time to do an agent’s work: search for properties, schedule appointments to see them, coordinate inspections, and negotiate. Home buyers who already have a property they want to buy are the best candidates to do the deal without an agent. Be aware that typically, on a home sale, the listing and selling agents split the commission with each other and their principal brokers.

Agents’ Titles and What They Mean

You may find the following commonly used titles when looking for a real estate agent. Here is a basic definition of each:

Principal broker: This is a person who is licensed to operate a real estate office. They may either work alone or employ other agents. Several years of experience are required to obtain this licensure. Anyone selling real estate must work under the supervision of a principal broker.

Realtor: A realtor is a member of the National Association of Realtors, along with a state realtors’ association and a local board of realtors. Realtors are bound by a code of ethics and have access to a local computerized database of homes for sale (multiple listing service).

Agent: This is the general term for any licensed professional in the real estate sales business.

Listing agent: A type of agent who signs up the home seller and lists the home with the multiple listing service.

Selling agent: An agent who finds a home for sale (through the multiple listing service) and finds a buyer for it.

Positive Traits to Look For in a Real Estate Agent

To find such a competent and experienced real agent, ask for references from recent clients in neighborhoods where you are house-hunting. That will help you determine whether the agent has the traits you want. Interview several candidates at different agencies and ask the following:

Is the Agent Full-Time?
Make sure the agent works in the field full-time. Otherwise, they may not be up-to-date on the fast-changing information and skills required for the job.

Is the Agent Experienced?
Be sure the agent has been doing the type of work you will need them to do for at least a few years. For example, if you are looking for a modest single-family home in the suburbs, make sure the agent has not spent the last five years handling mostly rentals or mansions.

Does the Agent Listen and Communicate Clearly?
The agent must be able to understand your priorities in purchasing a home and tell you what you need to know about a home. For instance, if you tell the agent repeatedly that you must have wood floors and a tree-lined neighborhood, and they persist in showing you linoleum floors on crowded streets, then get a new agent.

Is the Agent Willing to Negotiate For You?
To get the best home for your dollar, you will have to negotiate with the seller on the price. The agent plays a crucial role in the negotiation process between the buyer and seller. If they are not willing to show you houses that are 20 percent over your price range or to vigorously negotiate with the seller, find a new agent.

Is the Agent Careful In Their Work?
You need an agent who will cover all the details that go into buying a home. Someone who takes shortcuts to generate as many home sales as possible will not do you any good.

What Traits to Watch Out For

Here are some traits a good buyer’s real estate agent should not have. Most of them concern potential conflicts of interest that could arise with any commissioned salespeople. A commission salesperson’s goal is to see as many deals close as possible while putting in the minimum of hours. However, many agents still provide good service.

• The agent who tries to push you into deciding before you are comfortable doing so is to be avoided.
• Avoid agents who urge you to exceed your price range.
• Avoid agents who push you to buy their agency’s listings over other properties or who push you to use the attorneys or inspectors they recommend.
• Dishonest agents have been known to help the seller hide a defect or to look the other way. The only way to protect yourself from such deceit is to use an objective inspector.

When searching for a home, you must remember to remain focused on what you want (and don’t want) in a home. You may want to keep a list of items important to you, such as the neighborhood’s location, building materials used in a home, and proximity to schools.

Do not take anyone’s word for it. Investigate for yourself. Visit schools, walk around the neighborhood, look under carpets to see what the floors are made of, and stay in the basement for a while to see how damp it is. You may also want to drive through the neighborhood after dark to see if it is a safe place to live.

To have a benchmark for comparing home prices, find out what the price per square foot is for the homes you are looking at. To find the price per square foot, divide the asking price by its square footage. Sources of a home’s square footage include the local tax assessment agency, the real estate agent, and the home builder. You should verify any statement that might be self-serving.

Buying a home requires negotiating skills because successful negotiation can often save you tens of thousands of dollars. Here are some tips to keep in mind when negotiating for your hoped-for home:

• Be willing to walk away from a deal. If you decide you must have a certain house, you have already lost negotiating power. There are other good properties out there.
• Learn everything you can about the property before making your offer. For instance, how long has it been on the market? Has the buyer dropped the asking price? Why is the owner selling? The answers to these questions will help you to negotiate.
• Know what comparable homes are selling for.
• If the seller refuses to budge on the price, try negotiating for something else. For instance, try to get the seller to pay for repairs or improvements you would have done yourself.
• Don’t forget the real estate agent’s commission. It may also be negotiable.

When you and the seller finally agree upon a price and sign a contract, the next step (unless you’re paying cash or have arranged another type of loan) is to get a mortgage. Most home sales are contingent upon the buyer obtaining a mortgage.Getting the right mortgage is also important in that it too can result in savings of tens of thousands of dollars over the term of the mortgage. Because the discussion of mortgages is quite extensive, it is beyond the scope of this Financial Guide. Rather, it is covered in detail in other related Financial Guides such as:

Related Guide: Please see the Financial Guide: MORTGAGES ALTERNATIVES: How To Choose The Right One.

What is a Mortgage Service Provider?

A mortgage servicer collects your monthly payments and handles your escrow account. It also is required to give you an annual statement that details the activity of your escrow account. This statement shows your account balance and reflects property taxes and homeowners insurance payments.

When you apply for a home mortgage, you may think that the lender, or loan originator, will service the loan until it is paid off or your house is sold. This assumption is not always true. In today’s market, mortgage servicing rights often are bought and sold.

If you are notified that your home mortgage servicing has been sold to another company, you may wonder how it will affect your loan terms and monthly payments. Some consumers have complained that they were not given enough notice of loan servicing transfers and were unfairly charged late fees and penalties. The National Affordable Housing Act was passed to address some of these concerns.

To protect borrowers, the National Affordable Housing Act requires lenders or mortgage servicers (the company that borrowers pay their mortgage loan payments to) to do the following.

• They must provide a disclosure statement that says whether the lender intends to sell the mortgage servicing immediately, whether the mortgage servicing can be sold at any time during the life of the loan, and the percentage of loans the lender has sold previously.
• The lender also must provide information about servicing procedures, transfer practices, and complaint resolution.

They must notify you at least 15 days before they sell your loan unless you receive a written transfer notice at settlement. If your loan servicing is sold, you should receive two notices, one from the current mortgage servicer and one from the new mortgage servicer. The new servicer must notify you no more than 15 days after the transfer. The notices must include the following information:

• The name and address of the new servicer
• The date the current servicer will stop accepting mortgage payments and the date the new servicer will begin accepting them
• Toll-free or collect call telephone numbers for both the current servicer and the new servicer that you can call for information about the transfer of service
• Information about whether you can continue any optional insurance, such as credit life or disability insurance; what action you must take to maintain coverage; and whether the insurance terms will change
• A statement that the transfer will not affect any terms or conditions of the contract you signed with the original mortgage company, other than terms directly related to the servicing of such loan

For example, if your old lender did not require an escrow account but allowed you to pay property taxes and insurance premiums, the new servicer cannot demand that you establish such an account. They must grant a 60-day grace period, in which you cannot be charged a late fee if you mistakenly send your mortgage payment to the old mortgage servicer instead of the new one.

If you believe you have been improperly charged a penalty or late fee, or there are other problems with servicing your loan, contact your servicer in writing. Include your account number and explain why you believe your account is incorrect.

Within 20 business days of receiving your inquiry, the servicer must send you a written response acknowledging your inquiry. Within 60 business days, the servicer must correct your account or determine its accuracy. The servicer must send you a written notice of what action it took and why.

If you believe the servicer has not responded appropriately to your written inquiry, contact your local or state consumer protection office. You can also send your complaint to the FTC. Or, you may want to contact an attorney to advise you of your legal rights. Under the National Affordable Housing Act, consumers can initiate class action suits and obtain actual damages, plus additional damages, for a pattern or practice of noncompliance.

Do not subtract any disputed amount from your mortgage payment. Many mortgage services will refuse to accept partial payments. They may return the check and charge a late fee or declare the mortgage is in default and start foreclosure proceedings.

The home inspection is an objective visual examination of the physical structure and systems of the house from the roof to the foundation. The purchase of a home is probably the largest single investment you will ever make. Therefore, you should learn as much as you can about the condition of the property and the need for any major repairs before you buy so that you can minimize unpleasant surprises and difficulties afterward.A home inspection will also point out the positive aspects of a home and the maintenance that will be necessary to keep it in good shape. After the inspection, you will have a much clearer understanding of the property you are about to purchase and will be able to make a confident buying decision.The standard home inspector’s report will include the following: An evaluation of the condition of the home’s heating system. Central air conditioning system (temperature permitting). Interior plumbing and electrical systems. The roof, attic, and visible insulation. Walls, ceilings, floors, windows, and doors. The foundation and basement. The visible structure. If problems or symptoms are found, the inspector will refer you to the appropriate specialist or tradesperson for further evaluation.

Cost

The inspection fee for a typical one-family house varies geographically, as does the cost of housing. Similarly, within a given area, the inspection fee may vary depending on the size of the house, particular features of the house, its age, and possible additional services, such as septic, well, or radon testing.

Check local prices on your own. Do not let cost be a factor in deciding whether or not to have a home inspection or in the selection of your home inspector. The knowledge gained from an inspection is well worth the cost, and the lowest-priced inspector is not necessarily a bargain. The inspector’s qualifications, including experience, training, and professional affiliations, should be the most important consideration.

Why You Can’t Just “Do It Yourself”

Even the most experienced homeowner lacks the knowledge and expertise of a professional home inspector who has inspected hundreds, perhaps thousands, of homes. An inspector is familiar with all home construction elements, proper installation, and maintenance. The inspector understands how the home’s systems and components are intended to function together, as well as how and why they fail.

Further, most buyers find it difficult to remain completely objective and unemotional about the house they want, which may affect their judgment. For the most accurate picture, obtaining an impartial third-party opinion from an expert in the home inspection field is best.

How to Find a Home Inspector

The best source of recommendations is a friend or business acquaintance who has been satisfied with a home inspector they have used. Real estate agents are also generally familiar with home inspectors and should be able to provide you with a list of names from which to choose.

Whatever your referral source, ascertain the home inspector’s professional qualifications, experience, and business ethics before making a selection. You can do this by checking with your local Better Business Bureau as well as by verifying the inspector’s membership in a reputable professional association such as the American Society of Home Inspectors.

When Do You Call In the Home Inspector?

A home inspector is typically called right after the contract or purchase agreement has been signed. You don’t need to be present for the inspection, but it is recommended. By following the home inspector around the house, observing, and asking questions, you will learn a great deal about the home’s condition, how its systems work, and how to maintain it. You will also find the written report easier to understand if you’ve seen the property first-hand through the inspector’s eyes.

Before you sign, be sure that there is an inspection clause in the contract, making your purchase obligation contingent upon the findings of a professional home inspection. This clause should specify the terms to which both the buyer and seller are obligated.

What if the Report Reveals Problems?

No house is perfect. If the inspector finds problems, it does not necessarily mean you should not buy the house, only that you will know in advance what to expect. A seller may be flexible with the purchase price or contract terms if major problems are found. If your budget is very tight, or if you do not wish to become involved in future repair work, this information will be extremely important to you.

What if you find problems after you move in? A home inspection does not guarantee that problems will not develop after you move in. However, if you believe a problem was already visible at the inspection and should have been mentioned in the report, your first step should be to call and meet with the inspector to clarify the situation. Misunderstandings are often resolved in this manner. If necessary, you might wish to consult with a local mediation service to help you settle your disagreement.

Though many home inspectors today carry Errors & Omissions liability insurance, litigation should be considered a last resort. It is a difficult, expensive, and by no means foolproof recovery method.

For each home you are considering, bring a copy of the following list and fill it in. This form will enable you to record all the homes you visit and compare their features. You may be able to fill in much of the information from the multiple listing service sheets your real estate agent provides. Write down the size, materials, and any other comments you have about each item.

Other than whether you can afford a new home, here are some additional factors that you should consider when deciding whether to rent or buy:

• Home ownership is a less valuable investment when home prices are down. Of course, owning a principal residence is not just an investment
• When comparing the costs of renting against the costs of owning, factor in the valuable income tax deductions available for mortgage interest payments
• You may not have to pay tax on the capital gain when you sell your principal residence
• In a period of high-interest rates, owning a home is more costly
• Those who frequently move, every four years or less, for example, are often better off renting than buying