Homeowner documents key for tax deductions

By Sue McAllister
Knight Ridder News Service

There are times when you're sorry you're a homeowner — like when your roof's leaking. But being a homeowner is usually good news at tax time because of the deductions you get.

So every homeowner should keep the closing statements from your home purchase forever, essentially. The document — often referred to as a HUD-1 statement — can be crucial to calculating your taxes, now and in the future.

It shows how much you paid for the house and for closing costs, and how much, if any, you paid in points upfront.

Also keep the closing statement when you refinance a mortgage. If you pay points when you refinance, you can deduct them, too, spread over the term of the new loan.

As a homeowner, if you itemize you can deduct the amount you paid in property taxes and the interest you paid on your mortgage.

If you sell a home and make a profit, the first $500,000 of profit is tax-free if you are married. If you're single, $250,000 worth of gain is exempt from tax. In most cases, you must have lived in the home for two of the past five years to get the exemption. See IRS Publication 523 at www.irs.gov (click on Forms and Publications) for all the rules and exceptions.

To calculate your profit, subtract the home's "basis value" from the "adjusted" sales price. The basis value includes what you paid for the house, plus many of the costs of buying it — such as escrow fees — and the costs of any qualifying improvements you made. The adjusted sales price is the sale price minus some seller-related expenses, like real estate commissions.

A few other things to know, from tax preparer Larry Pon of Pon & Associates in Redwood City, Calif.:

• If you refinanced and are paying less interest every month, your tax deduction will be smaller than last year, when you had a higher-interest loan.
• If you get a home-equity loan for more than $100,000, the interest you pay on it is only deductible if you use it for a home purchase, construction or substantial improvement to your home. See IRS Publication 936 for details.