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Free Efile For 2011 Federal Taxes

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Free Efile For 2011 Federal Taxes

Free efile for 2011 federal taxes 22. Free efile for 2011 federal taxes   Taxes Table of Contents IntroductionIndian tribal government. Free efile for 2011 federal taxes Useful Items - You may want to see: Tests To Deduct Any Tax Income TaxesState and Local Income Taxes Foreign Income Taxes General Sales TaxesMotor vehicles. Free efile for 2011 federal taxes Real Estate TaxesReal estate taxes for prior years. Free efile for 2011 federal taxes Examples. Free efile for 2011 federal taxes Form 1099-S. Free efile for 2011 federal taxes Real Estate-Related Items You Cannot Deduct Personal Property Taxes Taxes and Fees You Cannot Deduct Where To Deduct Introduction This chapter discusses which taxes you can deduct if you itemize deductions on Schedule A (Form 1040). Free efile for 2011 federal taxes It also explains which taxes you can deduct on other schedules or forms and which taxes you cannot deduct. Free efile for 2011 federal taxes This chapter covers the following topics. Free efile for 2011 federal taxes Income taxes (federal, state, local, and foreign). Free efile for 2011 federal taxes General sales taxes (state and local). Free efile for 2011 federal taxes Real estate taxes (state, local, and foreign). Free efile for 2011 federal taxes Personal property taxes (state and local). Free efile for 2011 federal taxes Taxes and fees you cannot deduct. Free efile for 2011 federal taxes Use Table 22-1 as a guide to determine which taxes you can deduct. Free efile for 2011 federal taxes The end of the chapter contains a section that explains which forms you use to deduct different types of taxes. Free efile for 2011 federal taxes Business taxes. Free efile for 2011 federal taxes   You can deduct certain taxes only if they are ordinary and necessary expenses of your trade or business or of producing income. Free efile for 2011 federal taxes For information on these taxes, see Publication 535, Business Expenses. Free efile for 2011 federal taxes State or local taxes. Free efile for 2011 federal taxes   These are taxes imposed by the 50 states, U. Free efile for 2011 federal taxes S. Free efile for 2011 federal taxes possessions, or any of their political subdivisions (such as a county or city), or by the District of Columbia. Free efile for 2011 federal taxes Indian tribal government. Free efile for 2011 federal taxes   An Indian tribal government recognized by the Secretary of the Treasury as performing substantial government functions will be treated as a state for purposes of claiming a deduction for taxes. Free efile for 2011 federal taxes Income taxes, real estate taxes, and personal property taxes imposed by that Indian tribal government (or by any of its subdivisions that are treated as political subdivisions of a state) are deductible. Free efile for 2011 federal taxes General sales taxes. Free efile for 2011 federal taxes   These are taxes imposed at one rate on retail sales of a broad range of classes of items. Free efile for 2011 federal taxes Foreign taxes. Free efile for 2011 federal taxes   These are taxes imposed by a foreign country or any of its political subdivisions. Free efile for 2011 federal taxes Useful Items - You may want to see: Publication 514 Foreign Tax Credit for Individuals 530 Tax Information for Homeowners Form (and Instructions) Schedule A (Form 1040) Itemized Deductions Schedule E (Form 1040) Supplemental Income and Loss 1116 Foreign Tax Credit Tests To Deduct Any Tax The following two tests must be met for you to deduct any tax. Free efile for 2011 federal taxes The tax must be imposed on you. Free efile for 2011 federal taxes You must pay the tax during your tax year. Free efile for 2011 federal taxes The tax must be imposed on you. Free efile for 2011 federal taxes   In general, you can deduct only taxes imposed on you. Free efile for 2011 federal taxes   Generally, you can deduct property taxes only if you are an owner of the property. Free efile for 2011 federal taxes If your spouse owns the property and pays the real estate taxes, the taxes are deductible on your spouse's separate return or on your joint return. Free efile for 2011 federal taxes You must pay the tax during your tax year. Free efile for 2011 federal taxes   If you are a cash basis taxpayer, you can deduct only those taxes you actually paid during your tax year. Free efile for 2011 federal taxes If you pay your taxes by check, the day you mail or deliver the check is the date of payment, provided the check is honored by the financial institution. Free efile for 2011 federal taxes If you use a pay-by-phone account (such as a credit card or electronic funds withdrawal), the date reported on the statement of the financial institution showing when payment was made is the date of payment. Free efile for 2011 federal taxes If you contest a tax liability and are a cash basis taxpayer, you can deduct the tax only in the year you actually pay it (or transfer money or other property to provide for satisfaction of the contested liability). Free efile for 2011 federal taxes See Publication 538, Accounting Periods and Methods, for details. Free efile for 2011 federal taxes    If you use an accrual method of accounting, see Publication 538 for more information. Free efile for 2011 federal taxes Income Taxes This section discusses the deductibility of state and local income taxes (including employee contributions to state benefit funds) and foreign income taxes. Free efile for 2011 federal taxes State and Local Income Taxes You can deduct state and local income taxes. Free efile for 2011 federal taxes However, you can elect to deduct state and local general sales taxes instead of state and local income taxes. Free efile for 2011 federal taxes See General Sales Taxes , later. Free efile for 2011 federal taxes Exception. Free efile for 2011 federal taxes    You cannot deduct state and local income taxes you pay on income that is exempt from federal income tax, unless the exempt income is interest income. Free efile for 2011 federal taxes For example, you cannot deduct the part of a state's income tax that is on a cost-of-living allowance exempt from federal income tax. Free efile for 2011 federal taxes What To Deduct Your deduction may be for withheld taxes, estimated tax payments, or other tax payments as follows. Free efile for 2011 federal taxes Withheld taxes. Free efile for 2011 federal taxes   You can deduct state and local income taxes withheld from your salary in the year they are withheld. Free efile for 2011 federal taxes Your Form(s) W-2 will show these amounts. Free efile for 2011 federal taxes Forms W-2G, 1099-G, 1099-R, and 1099-MISC may also show state and local income taxes withheld. Free efile for 2011 federal taxes Estimated tax payments. Free efile for 2011 federal taxes   You can deduct estimated tax payments you made during the year to a state or local government. Free efile for 2011 federal taxes However, you must have a reasonable basis for making the estimated tax payments. Free efile for 2011 federal taxes Any estimated state or local tax payments that are not made in good faith at the time of payment are not deductible. Free efile for 2011 federal taxes For example, you made an estimated state income tax payment. Free efile for 2011 federal taxes However, the estimate of your state tax liability shows that you will get a refund of the full amount of your estimated payment. Free efile for 2011 federal taxes You had no reasonable basis to believe you had any additional liability for state income taxes and you cannot deduct the estimated tax payment. Free efile for 2011 federal taxes Refund applied to taxes. Free efile for 2011 federal taxes   You can deduct any part of a refund of prior-year state or local income taxes that you chose to have credited to your 2013 estimated state or local income taxes. Free efile for 2011 federal taxes    Do not reduce your deduction by either of the following items. Free efile for 2011 federal taxes Any state or local income tax refund (or credit) you expect to receive for 2013. Free efile for 2011 federal taxes Any refund of (or credit for) prior-year state and local income taxes you actually received in 2013. Free efile for 2011 federal taxes   However, part or all of this refund (or credit) may be taxable. Free efile for 2011 federal taxes See Refund (or credit) of state or local income taxes , later. Free efile for 2011 federal taxes Separate federal returns. Free efile for 2011 federal taxes   If you and your spouse file separate state, local, and federal income tax returns, you each can deduct on your federal return only the amount of your own state and local income tax that you paid during the tax year. Free efile for 2011 federal taxes Joint state and local returns. Free efile for 2011 federal taxes   If you and your spouse file joint state and local returns and separate federal returns, each of you can deduct on your separate federal return a part of the total state and local income taxes paid during the tax year. Free efile for 2011 federal taxes You can deduct only the amount of the total taxes that is proportionate to your gross income compared to the combined gross income of you and your spouse. Free efile for 2011 federal taxes However, you cannot deduct more than the amount you actually paid during the year. Free efile for 2011 federal taxes You can avoid this calculation if you and your spouse are jointly and individually liable for the full amount of the state and local income taxes. Free efile for 2011 federal taxes If so, you and your spouse can deduct on your separate federal returns the amount you each actually paid. Free efile for 2011 federal taxes Joint federal return. Free efile for 2011 federal taxes   If you file a joint federal return, you can deduct the total of the state and local income taxes both of you paid. Free efile for 2011 federal taxes Contributions to state benefit funds. Free efile for 2011 federal taxes    As an employee, you can deduct mandatory contributions to state benefit funds withheld from your wages that provide protection against loss of wages. Free efile for 2011 federal taxes For example, certain states require employees to make contributions to state funds providing disability or unemployment insurance benefits. Free efile for 2011 federal taxes Mandatory payments made to the following state benefit funds are deductible as state income taxes on Schedule A (Form 1040), line 5. Free efile for 2011 federal taxes Alaska Unemployment Compensation Fund. Free efile for 2011 federal taxes California Nonoccupational Disability Benefit Fund. Free efile for 2011 federal taxes New Jersey Nonoccupational Disability Benefit Fund. Free efile for 2011 federal taxes New Jersey Unemployment Compensation Fund. Free efile for 2011 federal taxes New York Nonoccupational Disability Benefit Fund. Free efile for 2011 federal taxes Pennsylvania Unemployment Compensation Fund. Free efile for 2011 federal taxes Rhode Island Temporary Disability Benefit Fund. Free efile for 2011 federal taxes Washington State Supplemental Workmen's Compensation Fund. Free efile for 2011 federal taxes    Employee contributions to private or voluntary disability plans are not deductible. Free efile for 2011 federal taxes Refund (or credit) of state or local income taxes. Free efile for 2011 federal taxes   If you receive a refund of (or credit for) state or local income taxes in a year after the year in which you paid them, you may have to include the refund in income on Form 1040, line 10, in the year you receive it. Free efile for 2011 federal taxes This includes refunds resulting from taxes that were overwithheld, applied from a prior year return, not figured correctly, or figured again because of an amended return. Free efile for 2011 federal taxes If you did not itemize your deductions in the previous year, do not include the refund in income. Free efile for 2011 federal taxes If you deducted the taxes in the previous year, include all or part of the refund on Form 1040, line 10, in the year you receive the refund. Free efile for 2011 federal taxes For a discussion of how much to include, see Recoveries in chapter 12. Free efile for 2011 federal taxes Foreign Income Taxes Generally, you can take either a deduction or a credit for income taxes imposed on you by a foreign country or a U. Free efile for 2011 federal taxes S. Free efile for 2011 federal taxes possession. Free efile for 2011 federal taxes However, you cannot take a deduction or credit for foreign income taxes paid on income that is exempt from U. Free efile for 2011 federal taxes S. Free efile for 2011 federal taxes tax under the foreign earned income exclusion or the foreign housing exclusion. Free efile for 2011 federal taxes For information on these exclusions, see Publication 54, Tax Guide for U. Free efile for 2011 federal taxes S. Free efile for 2011 federal taxes Citizens and Resident Aliens Abroad. Free efile for 2011 federal taxes For information on the foreign tax credit, see Publication 514. Free efile for 2011 federal taxes General Sales Taxes You can elect to deduct state and local general sales taxes, instead of state and local income taxes, as an itemized deduction on Schedule A (Form 1040), line 5b. Free efile for 2011 federal taxes You can use either your actual expenses or the state and local sales tax tables to figure your sales tax deduction. Free efile for 2011 federal taxes Actual expenses. Free efile for 2011 federal taxes   Generally, you can deduct the actual state and local general sales taxes (including compensating use taxes) if the tax rate was the same as the general sales tax rate. Free efile for 2011 federal taxes However, sales taxes on food, clothing, medical supplies, and motor vehicles are deductible as a general sales tax even if the tax rate was less than the general sales tax rate. Free efile for 2011 federal taxes If you paid sales tax on a motor vehicle at a rate higher than the general sales tax rate, you can deduct only the amount of tax that you would have paid at the general sales tax rate on that vehicle. Free efile for 2011 federal taxes If you use the actual expenses method, you must have receipts to show the general sales taxes paid. Free efile for 2011 federal taxes Do not include sales taxes paid on items used in your trade or business. Free efile for 2011 federal taxes Motor vehicles. Free efile for 2011 federal taxes   For purposes of this section, motor vehicles include cars, motorcycles, motor homes, recreational vehicles, sport utility vehicles, trucks, vans, and off-road vehicles. Free efile for 2011 federal taxes This also includes sales taxes on a leased motor vehicle, but not on vehicles used in your trade or business. Free efile for 2011 federal taxes Optional sales tax tables. Free efile for 2011 federal taxes   Instead of using your actual expenses, you can figure your state and local general sales tax deduction using the state and local sales tax tables in the Instructions for Schedule A (Form 1040). Free efile for 2011 federal taxes You may also be able to add the state and local general sales taxes paid on certain specified items. Free efile for 2011 federal taxes   Your applicable table amount is based on the state where you live, your income, and the number of exemptions claimed on your tax return. Free efile for 2011 federal taxes Your income is your adjusted gross income plus any nontaxable items such as the following. Free efile for 2011 federal taxes Tax-exempt interest. Free efile for 2011 federal taxes Veterans' benefits. Free efile for 2011 federal taxes Nontaxable combat pay. Free efile for 2011 federal taxes Workers' compensation. Free efile for 2011 federal taxes Nontaxable part of social security and railroad retirement benefits. Free efile for 2011 federal taxes Nontaxable part of IRA, pension, or annuity distributions, excluding rollovers. Free efile for 2011 federal taxes Public assistance payments. Free efile for 2011 federal taxes If you lived in different states during the same tax year, you must prorate your applicable table amount for each state based on the days you lived in each state. Free efile for 2011 federal taxes See the Instructions for Schedule A (Form 1040), line 5, for details. Free efile for 2011 federal taxes Real Estate Taxes Deductible real estate taxes are any state, local, or foreign taxes on real property levied for the general public welfare. Free efile for 2011 federal taxes You can deduct these taxes only if they are based on the assessed value of the real property and charged uniformly against all property under the jurisdiction of the taxing authority. Free efile for 2011 federal taxes Deductible real estate taxes generally do not include taxes charged for local benefits and improvements that increase the value of the property. Free efile for 2011 federal taxes They also do not include itemized charges for services (such as trash collection) assessed against specific property or certain people, even if the charge is paid to the taxing authority. Free efile for 2011 federal taxes For more information about taxes and charges that are not deductible, see Real Estate-Related Items You Cannot Deduct , later. Free efile for 2011 federal taxes Tenant-shareholders in a cooperative housing corporation. Free efile for 2011 federal taxes   Generally, if you are a tenant-stockholder in a cooperative housing corporation, you can deduct the amount paid to the corporation that represents your share of the real estate taxes the corporation paid or incurred for your dwelling unit. Free efile for 2011 federal taxes The corporation should provide you with a statement showing your share of the taxes. Free efile for 2011 federal taxes For more information, see Special Rules for Cooperatives in Publication 530. Free efile for 2011 federal taxes Division of real estate taxes between buyers and sellers. Free efile for 2011 federal taxes   If you bought or sold real estate during the year, the real estate taxes must be divided between the buyer and the seller. Free efile for 2011 federal taxes   The buyer and the seller must divide the real estate taxes according to the number of days in the real property tax year (the period to which the tax is imposed relates) that each owned the property. Free efile for 2011 federal taxes The seller is treated as paying the taxes up to, but not including, the date of sale. Free efile for 2011 federal taxes The buyer is treated as paying the taxes beginning with the date of sale. Free efile for 2011 federal taxes This applies regardless of the lien dates under local law. Free efile for 2011 federal taxes Generally, this information is included on the settlement statement provided at the closing. Free efile for 2011 federal taxes    If you (the seller) cannot deduct taxes until they are paid because you use the cash method of accounting, and the buyer of your property is personally liable for the tax, you are considered to have paid your part of the tax at the time of the sale. Free efile for 2011 federal taxes This lets you deduct the part of the tax to the date of sale even though you did not actually pay it. Free efile for 2011 federal taxes However, you must also include the amount of that tax in the selling price of the property. Free efile for 2011 federal taxes The buyer must include the same amount in his or her cost of the property. Free efile for 2011 federal taxes   You figure your deduction for taxes on each property bought or sold during the real property tax year as follows. Free efile for 2011 federal taxes Worksheet 22-1. Free efile for 2011 federal taxes Figuring Your Real Estate Tax Deduction 1. Free efile for 2011 federal taxes Enter the total real estate taxes for the real property tax year   2. Free efile for 2011 federal taxes Enter the number of days in the real property tax year that you owned the property   3. Free efile for 2011 federal taxes Divide line 2 by 365 (for leap years, divide line 2 by 366) . Free efile for 2011 federal taxes 4. Free efile for 2011 federal taxes Multiply line 1 by line 3. Free efile for 2011 federal taxes This is your deduction. Free efile for 2011 federal taxes Enter it on Schedule A (Form 1040), line 6   Note. Free efile for 2011 federal taxes Repeat steps 1 through 4 for each property you bought or sold during the real property tax year. Free efile for 2011 federal taxes Your total deduction is the sum of the line 4 amounts for all of the properties. Free efile for 2011 federal taxes Real estate taxes for prior years. Free efile for 2011 federal taxes   Do not divide delinquent taxes between the buyer and seller if the taxes are for any real property tax year before the one in which the property is sold. Free efile for 2011 federal taxes Even if the buyer agrees to pay the delinquent taxes, the buyer cannot deduct them. Free efile for 2011 federal taxes The buyer must add them to the cost of the property. Free efile for 2011 federal taxes The seller can deduct these taxes paid by the buyer. Free efile for 2011 federal taxes However, the seller must include them in the selling price. Free efile for 2011 federal taxes Examples. Free efile for 2011 federal taxes   The following examples illustrate how real estate taxes are divided between buyer and seller. Free efile for 2011 federal taxes Example 1. Free efile for 2011 federal taxes Dennis and Beth White's real property tax year for both their old home and their new home is the calendar year, with payment due August 1. Free efile for 2011 federal taxes The tax on their old home, sold on May 7, was $620. Free efile for 2011 federal taxes The tax on their new home, bought on May 3, was $732. Free efile for 2011 federal taxes Dennis and Beth are considered to have paid a proportionate share of the real estate taxes on the old home even though they did not actually pay them to the taxing authority. Free efile for 2011 federal taxes On the other hand, they can claim only a proportionate share of the taxes they paid on their new property even though they paid the entire amount. Free efile for 2011 federal taxes Dennis and Beth owned their old home during the real property tax year for 126 days (January 1 to May 6, the day before the sale). Free efile for 2011 federal taxes They figure their deduction for taxes on their old home as follows. Free efile for 2011 federal taxes Worksheet 22-1. Free efile for 2011 federal taxes Figuring Your Real Estate Tax Deduction — Taxes on Old Home 1. Free efile for 2011 federal taxes Enter the total real estate taxes for the real property tax year $620 2. Free efile for 2011 federal taxes Enter the number of days in the real property tax year that you owned the property 126 3. Free efile for 2011 federal taxes Divide line 2 by 365 (for leap years, divide line 2 by 366) . Free efile for 2011 federal taxes 3452 4. Free efile for 2011 federal taxes Multiply line 1 by line 3. Free efile for 2011 federal taxes This is your deduction. Free efile for 2011 federal taxes Enter it on Schedule A (Form 1040), line 6 $214 Since the buyers of their old home paid all of the taxes, Dennis and Beth also include the $214 in the selling price of the old home. Free efile for 2011 federal taxes (The buyers add the $214 to their cost of the home. Free efile for 2011 federal taxes ) Dennis and Beth owned their new home during the real property tax year for 243 days (May 3 to December 31, including their date of purchase). Free efile for 2011 federal taxes They figure their deduction for taxes on their new home as follows. Free efile for 2011 federal taxes Worksheet 22-1. Free efile for 2011 federal taxes Figuring Your Real Estate Tax Deduction — Taxes on New Home 1. Free efile for 2011 federal taxes Enter the total real estate taxes for the real property tax year $732 2. Free efile for 2011 federal taxes Enter the number of days in the real property tax year that you owned the property 243 3. Free efile for 2011 federal taxes Divide line 2 by 365 (for leap years, divide line 2 by 366) . Free efile for 2011 federal taxes 6658 4. Free efile for 2011 federal taxes Multiply line 1 by line 3. Free efile for 2011 federal taxes This is your deduction. Free efile for 2011 federal taxes Enter it on Schedule A (Form 1040), line 6 $487 Since Dennis and Beth paid all of the taxes on the new home, they add $245 ($732 paid less $487 deduction) to their cost of the new home. Free efile for 2011 federal taxes (The sellers add this $245 to their selling price and deduct the $245 as a real estate tax. Free efile for 2011 federal taxes ) Dennis and Beth's real estate tax deduction for their old and new homes is the sum of $214 and $487, or $701. Free efile for 2011 federal taxes They will enter this amount on Schedule A (Form 1040), line 6. Free efile for 2011 federal taxes Example 2. Free efile for 2011 federal taxes George and Helen Brown bought a new home on May 3, 2013. Free efile for 2011 federal taxes Their real property tax year for the new home is the calendar year. Free efile for 2011 federal taxes Real estate taxes for 2012 were assessed in their state on January 1, 2013. Free efile for 2011 federal taxes The taxes became due on May 31, 2013, and October 31, 2013. Free efile for 2011 federal taxes The Browns agreed to pay all taxes due after the date of purchase. Free efile for 2011 federal taxes Real estate taxes for 2012 were $680. Free efile for 2011 federal taxes They paid $340 on May 31, 2013, and $340 on October 31, 2013. Free efile for 2011 federal taxes These taxes were for the 2012 real property tax year. Free efile for 2011 federal taxes The Browns cannot deduct them since they did not own the property until 2013. Free efile for 2011 federal taxes Instead, they must add $680 to the cost of their new home. Free efile for 2011 federal taxes In January 2014, the Browns receive their 2013 property tax statement for $752, which they will pay in 2014. Free efile for 2011 federal taxes The Browns owned their new home during the 2013 real property tax year for 243 days (May 3 to December 31). Free efile for 2011 federal taxes They will figure their 2014 deduction for taxes as follows. Free efile for 2011 federal taxes Worksheet 22-1. Free efile for 2011 federal taxes Figuring Your Real Estate Tax Deduction — Taxes on New Home 1. Free efile for 2011 federal taxes Enter the total real estate taxes for the real property tax year $752 2. Free efile for 2011 federal taxes Enter the number of days in the real property tax year that you owned the property 243 3. Free efile for 2011 federal taxes Divide line 2 by 365 (for leap years, divide line 2 by 366) . Free efile for 2011 federal taxes 6658 4. Free efile for 2011 federal taxes Multiply line 1 by line 3. Free efile for 2011 federal taxes This is your deduction. Free efile for 2011 federal taxes Claim it on Schedule A (Form 1040), line 6 $501 The remaining $251 ($752 paid less $501 deduction) of taxes paid in 2014, along with the $680 paid in 2013, is added to the cost of their new home. Free efile for 2011 federal taxes Because the taxes up to the date of sale are considered paid by the seller on the date of sale, the seller is entitled to a 2013 tax deduction of $931. Free efile for 2011 federal taxes This is the sum of the $680 for 2012 and the $251 for the 122 days the seller owned the home in 2013. Free efile for 2011 federal taxes The seller must also include the $931 in the selling price when he or she figures the gain or loss on the sale. Free efile for 2011 federal taxes The seller should contact the Browns in January 2014 to find out how much real estate tax is due for 2013. Free efile for 2011 federal taxes Form 1099-S. Free efile for 2011 federal taxes   For certain sales or exchanges of real estate, the person responsible for closing the sale (generally the settlement agent) prepares Form 1099-S, Proceeds From Real Estate Transactions, to report certain information to the IRS and to the seller of the property. Free efile for 2011 federal taxes Box 2 of Form 1099-S is for the gross proceeds from the sale and should include the portion of the seller's real estate tax liability that the buyer will pay after the date of sale. Free efile for 2011 federal taxes The buyer includes these taxes in the cost basis of the property, and the seller both deducts this amount as a tax paid and includes it in the sales price of the property. Free efile for 2011 federal taxes   For a real estate transaction that involves a home, any real estate tax the seller paid in advance but that is the liability of the buyer appears on Form 1099-S, box 5. Free efile for 2011 federal taxes The buyer deducts this amount as a real estate tax, and the seller reduces his or her real estate tax deduction (or includes it in income) by the same amount. Free efile for 2011 federal taxes See Refund (or rebate) , later. Free efile for 2011 federal taxes Taxes placed in escrow. Free efile for 2011 federal taxes   If your monthly mortgage payment includes an amount placed in escrow (put in the care of a third party) for real estate taxes, you may not be able to deduct the total amount placed in escrow. Free efile for 2011 federal taxes You can deduct only the real estate tax that the third party actually paid to the taxing authority. Free efile for 2011 federal taxes If the third party does not notify you of the amount of real estate tax that was paid for you, contact the third party or the taxing authority to find the proper amount to show on your return. Free efile for 2011 federal taxes Tenants by the entirety. Free efile for 2011 federal taxes   If you and your spouse held property as tenants by the entirety and you file separate federal returns, each of you can deduct only the taxes each of you paid on the property. Free efile for 2011 federal taxes Divorced individuals. Free efile for 2011 federal taxes   If your divorce or separation agreement states that you must pay the real estate taxes for a home owned by you and your spouse, part of your payments may be deductible as alimony and part as real estate taxes. Free efile for 2011 federal taxes See Taxes and insurance in chapter 18 for more information. Free efile for 2011 federal taxes Ministers' and military housing allowances. Free efile for 2011 federal taxes   If you are a minister or a member of the uniformed services and receive a housing allowance that you can exclude from income, you still can deduct all of the real estate taxes you pay on your home. Free efile for 2011 federal taxes Refund (or rebate). Free efile for 2011 federal taxes   If you received a refund or rebate in 2013 of real estate taxes you paid in 2013, you must reduce your deduction by the amount refunded to you. Free efile for 2011 federal taxes If you received a refund or rebate in 2013 of real estate taxes you deducted in an earlier year (either as an itemized deduction or an increase to your standard deduction), you generally must include the refund or rebate in income in the year you receive it. Free efile for 2011 federal taxes However, the amount you include in income is limited to the amount of the deduction that reduced your tax in the earlier year. Free efile for 2011 federal taxes For more information, see Recoveries in chapter 12. Free efile for 2011 federal taxes Table 22-1. Free efile for 2011 federal taxes Which Taxes Can You Deduct? Type of Tax You Can Deduct You Cannot Deduct Fees and Charges Fees and charges that are expenses of your trade or business or of producing income. Free efile for 2011 federal taxes Fees and charges that are not expenses of your trade or business or of producing income, such as fees for driver's licenses, car inspections, parking, or charges for water bills (see Taxes and Fees You Cannot Deduct ). Free efile for 2011 federal taxes     Fines and penalties. Free efile for 2011 federal taxes Income Taxes State and local income taxes. Free efile for 2011 federal taxes Federal income taxes. Free efile for 2011 federal taxes   Foreign income taxes. Free efile for 2011 federal taxes     Employee contributions to state funds listed under Contributions to state benefit funds . Free efile for 2011 federal taxes Employee contributions to private or voluntary disability plans. Free efile for 2011 federal taxes     State and local general sales taxes if you choose to deduct state and local income taxes. Free efile for 2011 federal taxes General Sales Taxes State and local general sales taxes, including compensating use taxes. Free efile for 2011 federal taxes State and local income taxes if you choose to deduct state and local general sales taxes. Free efile for 2011 federal taxes Other Taxes Taxes that are expenses of your trade or business. Free efile for 2011 federal taxes Federal excise taxes, such as tax on gasoline, that are not expenses of your trade or business or of producing income. Free efile for 2011 federal taxes   Taxes on property producing rent or royalty income. Free efile for 2011 federal taxes Per capita taxes. Free efile for 2011 federal taxes   Occupational taxes. Free efile for 2011 federal taxes See chapter 28. Free efile for 2011 federal taxes     One-half of self-employment tax paid. Free efile for 2011 federal taxes   Personal Property Taxes State and local personal property taxes. Free efile for 2011 federal taxes Customs duties that are not expenses of your trade or business or of producing income. Free efile for 2011 federal taxes Real Estate Taxes State and local real estate taxes. Free efile for 2011 federal taxes Real estate taxes that are treated as imposed on someone else (see Division of real estate taxes between buyers and sellers ). Free efile for 2011 federal taxes   Foreign real estate taxes. Free efile for 2011 federal taxes Taxes for local benefits (with exceptions). Free efile for 2011 federal taxes See Real Estate-Related Items You Cannot Deduct . Free efile for 2011 federal taxes   Tenant's share of real estate taxes paid by  cooperative housing corporation. Free efile for 2011 federal taxes Trash and garbage pickup fees (with exceptions). Free efile for 2011 federal taxes See Real Estate-Related Items You Cannot Deduct . Free efile for 2011 federal taxes     Rent increase due to higher real estate taxes. Free efile for 2011 federal taxes     Homeowners' association charges. Free efile for 2011 federal taxes Real Estate-Related Items You Cannot Deduct Payments for the following items generally are not deductible as real estate taxes. Free efile for 2011 federal taxes Taxes for local benefits. Free efile for 2011 federal taxes Itemized charges for services (such as trash and garbage pickup fees). Free efile for 2011 federal taxes Transfer taxes (or stamp taxes). Free efile for 2011 federal taxes Rent increases due to higher real estate taxes. Free efile for 2011 federal taxes Homeowners' association charges. Free efile for 2011 federal taxes Taxes for local benefits. Free efile for 2011 federal taxes   Deductible real estate taxes generally do not include taxes charged for local benefits and improvements tending to increase the value of your property. Free efile for 2011 federal taxes These include assessments for streets, sidewalks, water mains, sewer lines, public parking facilities, and similar improvements. Free efile for 2011 federal taxes You should increase the basis of your property by the amount of the assessment. Free efile for 2011 federal taxes   Local benefit taxes are deductible only if they are for maintenance, repair, or interest charges related to those benefits. Free efile for 2011 federal taxes If only a part of the taxes is for maintenance, repair, or interest, you must be able to show the amount of that part to claim the deduction. Free efile for 2011 federal taxes If you cannot determine what part of the tax is for maintenance, repair, or interest, none of it is deductible. Free efile for 2011 federal taxes    Taxes for local benefits may be included in your real estate tax bill. Free efile for 2011 federal taxes If your taxing authority (or mortgage lender) does not furnish you a copy of your real estate tax bill, ask for it. Free efile for 2011 federal taxes You should use the rules above to determine if the local benefit tax is deductible. Free efile for 2011 federal taxes Contact the taxing authority if you need additional information about a specific charge on your real estate tax bill. Free efile for 2011 federal taxes Itemized charges for services. Free efile for 2011 federal taxes    An itemized charge for services assessed against specific property or certain people is not a tax, even if the charge is paid to the taxing authority. Free efile for 2011 federal taxes For example, you cannot deduct the charge as a real estate tax if it is: A unit fee for the delivery of a service (such as a $5 fee charged for every 1,000 gallons of water you use), A periodic charge for a residential service (such as a $20 per month or $240 annual fee charged to each homeowner for trash collection), or A flat fee charged for a single service provided by your government (such as a $30 charge for mowing your lawn because it was allowed to grow higher than permitted under your local ordinance). Free efile for 2011 federal taxes    You must look at your real estate tax bill to determine if any nondeductible itemized charges, such as those listed above, are included in the bill. Free efile for 2011 federal taxes If your taxing authority (or mortgage lender) does not furnish you a copy of your real estate tax bill, ask for it. Free efile for 2011 federal taxes Exception. Free efile for 2011 federal taxes   Service charges used to maintain or improve services (such as trash collection or police and fire protection) are deductible as real estate taxes if: The fees or charges are imposed at a like rate against all property in the taxing jurisdiction, The funds collected are not earmarked; instead, they are commingled with general revenue funds, and Funds used to maintain or improve services are not limited to or determined by the amount of these fees or charges collected. Free efile for 2011 federal taxes Transfer taxes (or stamp taxes). Free efile for 2011 federal taxes   Transfer taxes and similar taxes and charges on the sale of a personal home are not deductible. Free efile for 2011 federal taxes If they are paid by the seller, they are expenses of the sale and reduce the amount realized on the sale. Free efile for 2011 federal taxes If paid by the buyer, they are included in the cost basis of the property. Free efile for 2011 federal taxes Rent increase due to higher real estate taxes. Free efile for 2011 federal taxes   If your landlord increases your rent in the form of a tax surcharge because of increased real estate taxes, you cannot deduct the increase as taxes. Free efile for 2011 federal taxes Homeowners' association charges. Free efile for 2011 federal taxes   These charges are not deductible because they are imposed by the homeowners' association, rather than the state or local government. Free efile for 2011 federal taxes Personal Property Taxes Personal property tax is deductible if it is a state or local tax that is: Charged on personal property, Based only on the value of the personal property, and Charged on a yearly basis, even if it is collected more or less than once a year. Free efile for 2011 federal taxes A tax that meets the above requirements can be considered charged on personal property even if it is for the exercise of a privilege. Free efile for 2011 federal taxes For example, a yearly tax based on value qualifies as a personal property tax even if it is called a registration fee and is for the privilege of registering motor vehicles or using them on the highways. Free efile for 2011 federal taxes If the tax is partly based on value and partly based on other criteria, it may qualify in part. Free efile for 2011 federal taxes Example. Free efile for 2011 federal taxes Your state charges a yearly motor vehicle registration tax of 1% of value plus 50 cents per hundredweight. Free efile for 2011 federal taxes You paid $32 based on the value ($1,500) and weight (3,400 lbs. Free efile for 2011 federal taxes ) of your car. Free efile for 2011 federal taxes You can deduct $15 (1% × $1,500) as a personal property tax because it is based on the value. Free efile for 2011 federal taxes The remaining $17 ($. Free efile for 2011 federal taxes 50 × 34), based on the weight, is not deductible. Free efile for 2011 federal taxes Taxes and Fees You Cannot Deduct Many federal, state, and local government taxes are not deductible because they do not fall within the categories discussed earlier. Free efile for 2011 federal taxes Other taxes and fees, such as federal income taxes, are not deductible because the tax law specifically prohibits a deduction for them. Free efile for 2011 federal taxes See Table 22-1. Free efile for 2011 federal taxes Taxes and fees that are generally not deductible include the following items. Free efile for 2011 federal taxes Employment taxes. Free efile for 2011 federal taxes This includes social security, Medicare, and railroad retirement taxes withheld from your pay. Free efile for 2011 federal taxes However, one-half of self-employment tax you pay is deductible. Free efile for 2011 federal taxes In addition, the social security and other employment taxes you pay on the wages of a household worker may be included in medical expenses that you can deduct or child care expenses that allow you to claim the child and dependent care credit. Free efile for 2011 federal taxes For more information, see chapters 21 and 32. Free efile for 2011 federal taxes Estate, inheritance, legacy, or succession taxes. Free efile for 2011 federal taxes However, you can deduct the estate tax attributable to income in respect of a decedent if you, as a beneficiary, must include that income in your gross income. Free efile for 2011 federal taxes In that case, deduct the estate tax as a miscellaneous deduction that is not subject to the 2%-of-adjusted-gross-income limit. Free efile for 2011 federal taxes For more information, see Publication 559, Survivors, Executors, and Administrators. Free efile for 2011 federal taxes Federal income taxes. Free efile for 2011 federal taxes This includes income taxes withheld from your pay. Free efile for 2011 federal taxes Fines and penalties. Free efile for 2011 federal taxes You cannot deduct fines and penalties paid to a government for violation of any law, including related amounts forfeited as collateral deposits. Free efile for 2011 federal taxes Gift taxes. Free efile for 2011 federal taxes License fees. Free efile for 2011 federal taxes You cannot deduct license fees for personal purposes (such as marriage, driver's, and dog license fees). Free efile for 2011 federal taxes Per capita taxes. Free efile for 2011 federal taxes You cannot deduct state or local per capita taxes. Free efile for 2011 federal taxes Many taxes and fees other than those listed above are also nondeductible, unless they are ordinary and necessary expenses of a business or income producing activity. Free efile for 2011 federal taxes For other nondeductible items, see Real Estate-Related Items You Cannot Deduct , earlier. Free efile for 2011 federal taxes Where To Deduct You deduct taxes on the following schedules. Free efile for 2011 federal taxes State and local income taxes. Free efile for 2011 federal taxes    These taxes are deducted on Schedule A (Form 1040), line 5, even if your only source of income is from business, rents, or royalties. Free efile for 2011 federal taxes Check box a on line 5. Free efile for 2011 federal taxes General sales taxes. Free efile for 2011 federal taxes   Sales taxes are deducted on Schedule A (Form 1040), line 5. Free efile for 2011 federal taxes You must check box b on line 5. Free efile for 2011 federal taxes If you elect to deduct sales taxes, you cannot deduct state and local income taxes on Schedule A (Form 1040), line 5, box a. Free efile for 2011 federal taxes Foreign income taxes. Free efile for 2011 federal taxes   Generally, income taxes you pay to a foreign country or U. Free efile for 2011 federal taxes S. Free efile for 2011 federal taxes possession can be claimed as an itemized deduction on Schedule A (Form 1040), line 8, or as a credit against your U. Free efile for 2011 federal taxes S. Free efile for 2011 federal taxes income tax on Form 1040, line 47. Free efile for 2011 federal taxes To claim the credit, you may have to complete and attach Form 1116. Free efile for 2011 federal taxes For more information, see chapter 37, the Form 1040 instructions, or Publication 514. Free efile for 2011 federal taxes Real estate taxes and personal property taxes. Free efile for 2011 federal taxes    Real estate and personal property taxes are deducted on Schedule A (Form 1040), lines 6 and 7, respectively, unless they are paid on property used in your business, in which case they are deducted on Schedule C, Schedule C-EZ, or Schedule F (Form 1040). Free efile for 2011 federal taxes Taxes on property that produces rent or royalty income are deducted on Schedule E (Form 1040). Free efile for 2011 federal taxes Self-employment tax. Free efile for 2011 federal taxes    Deduct one-half of your self-employment tax on Form 1040, line 27. Free efile for 2011 federal taxes Other taxes. Free efile for 2011 federal taxes    All other deductible taxes are deducted on Schedule A (Form 1040), line 8. 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    The Free Efile For 2011 Federal Taxes

    Free efile for 2011 federal taxes Publication 530 - Main Content Table of Contents What You Can and Cannot DeductHardest Hit Fund and Emergency Homeowners' Loan Programs Real Estate Taxes Sales Taxes Home Mortgage Interest Mortgage Insurance Premiums Mortgage Interest CreditFiguring the Credit BasisFiguring Your Basis Adjusted Basis Keeping Records How To Get Tax HelpLow Income Taxpayer Clinics What You Can and Cannot Deduct To deduct expenses of owning a home, you must file Form 1040, U. Free efile for 2011 federal taxes S. Free efile for 2011 federal taxes Individual Income Tax Return, and itemize your deductions on Schedule A (Form 1040). Free efile for 2011 federal taxes If you itemize, you cannot take the standard deduction. Free efile for 2011 federal taxes This section explains what expenses you can deduct as a homeowner. Free efile for 2011 federal taxes It also points out expenses that you cannot deduct. Free efile for 2011 federal taxes There are four primary discussions: real estate taxes, sales taxes, home mortgage interest, and mortgage insurance premiums. Free efile for 2011 federal taxes Generally, your real estate taxes, home mortgage interest, and mortgage insurance premiums are included in your house payment. Free efile for 2011 federal taxes Your house payment. Free efile for 2011 federal taxes   If you took out a mortgage (loan) to finance the purchase of your home, you probably have to make monthly house payments. Free efile for 2011 federal taxes Your house payment may include several costs of owning a home. Free efile for 2011 federal taxes The only costs you can deduct are real estate taxes actually paid to the taxing authority, interest that qualifies as home mortgage interest, and mortgage insurance premiums. Free efile for 2011 federal taxes These are discussed in more detail later. Free efile for 2011 federal taxes   Some nondeductible expenses that may be included in your house payment include: Fire or homeowner's insurance premiums, and The amount applied to reduce the principal of the mortgage. Free efile for 2011 federal taxes Minister's or military housing allowance. Free efile for 2011 federal taxes   If you are a minister or a member of the uniformed services and receive a housing allowance that is not taxable, you still can deduct your real estate taxes and your home mortgage interest. Free efile for 2011 federal taxes You do not have to reduce your deductions by your nontaxable allowance. Free efile for 2011 federal taxes For more information see Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers, and Publication 3, Armed Forces' Tax Guide. Free efile for 2011 federal taxes Nondeductible payments. Free efile for 2011 federal taxes   You cannot deduct any of the following items. Free efile for 2011 federal taxes Insurance (other than mortgage insurance premiums), including fire and comprehensive coverage, and title insurance. Free efile for 2011 federal taxes Wages you pay for domestic help. Free efile for 2011 federal taxes Depreciation. Free efile for 2011 federal taxes The cost of utilities, such as gas, electricity, or water. Free efile for 2011 federal taxes Most settlement costs. Free efile for 2011 federal taxes See Settlement or closing costs under Cost as Basis, later, for more information. Free efile for 2011 federal taxes Forfeited deposits, down payments, or earnest money. Free efile for 2011 federal taxes Hardest Hit Fund and Emergency Homeowners' Loan Programs You can use a special method to compute your deduction for mortgage interest and real estate taxes on your main home if you meet the following two conditions. Free efile for 2011 federal taxes You received assistance under: A State Housing Finance Agency (State HFA) Hardest Hit Fund program in which program payments could be used to pay mortgage interest, or An Emergency Homeowners' Loan Program administered by the Department of Housing and Urban Development (HUD) or a state. Free efile for 2011 federal taxes You meet the rules to deduct all of the mortgage interest on your loan and all of the real estate taxes on your main home. Free efile for 2011 federal taxes If you meet these tests, then you can deduct all of the payments you actually made during the year to your mortgage servicer, the State HFA, or HUD on the home mortgage (including the amount shown on box 3 of Form 1098-MA, Mortgage Assistance Payments), but not more than the sum of the amounts shown on Form 1098, Mortgage Interest Statement, in box 1 (mortgage interest received), box 4 (mortgage insurance premiums) and box 5 (real property taxes). Free efile for 2011 federal taxes However, you are not required to use this special method to compute your deduction for mortgage interest and real estate taxes on your main home. Free efile for 2011 federal taxes Real Estate Taxes Most state and local governments charge an annual tax on the value of real property. Free efile for 2011 federal taxes This is called a real estate tax. Free efile for 2011 federal taxes You can deduct the tax if it is assessed uniformly at a like rate on all real property throughout the community. Free efile for 2011 federal taxes The proceeds must be for general community or governmental purposes and not be a payment for a special privilege granted or service rendered to you. Free efile for 2011 federal taxes Deductible Real Estate Taxes You can deduct real estate taxes imposed on you. Free efile for 2011 federal taxes You must have paid them either at settlement or closing, or to a taxing authority (either directly or through an escrow account) during the year. Free efile for 2011 federal taxes If you own a cooperative apartment, see Special Rules for Cooperatives , later. Free efile for 2011 federal taxes Where to deduct real estate taxes. Free efile for 2011 federal taxes   Enter the amount of your deductible real estate taxes on Schedule A (Form 1040), line 6. Free efile for 2011 federal taxes Real estate taxes paid at settlement or closing. Free efile for 2011 federal taxes   Real estate taxes are generally divided so that you and the seller each pay taxes for the part of the property tax year you owned the home. Free efile for 2011 federal taxes Your share of these taxes is fully deductible if you itemize your deductions. Free efile for 2011 federal taxes Division of real estate taxes. Free efile for 2011 federal taxes   For federal income tax purposes, the seller is treated as paying the property taxes up to, but not including, the date of sale. Free efile for 2011 federal taxes You (the buyer) are treated as paying the taxes beginning with the date of sale. Free efile for 2011 federal taxes This applies regardless of the lien dates under local law. Free efile for 2011 federal taxes Generally, this information is included on the settlement statement you get at closing. Free efile for 2011 federal taxes   You and the seller each are considered to have paid your own share of the taxes, even if one or the other paid the entire amount. Free efile for 2011 federal taxes You each can deduct your own share, if you itemize deductions, for the year the property is sold. Free efile for 2011 federal taxes Example. Free efile for 2011 federal taxes You bought your home on September 1. Free efile for 2011 federal taxes The property tax year (the period to which the tax relates) in your area is the calendar year. Free efile for 2011 federal taxes The tax for the year was $730 and was due and paid by the seller on August 15. Free efile for 2011 federal taxes You owned your new home during the property tax year for 122 days (September 1 to December 31, including your date of purchase). Free efile for 2011 federal taxes You figure your deduction for real estate taxes on your home as follows. Free efile for 2011 federal taxes 1. Free efile for 2011 federal taxes Enter the total real estate taxes for the real property tax year $730 2. Free efile for 2011 federal taxes Enter the number of days in the property tax year that you owned the property 122 3. Free efile for 2011 federal taxes Divide line 2 by 365 . Free efile for 2011 federal taxes 3342 4. Free efile for 2011 federal taxes Multiply line 1 by line 3. Free efile for 2011 federal taxes This is your deduction. Free efile for 2011 federal taxes Enter it on Schedule A (Form 1040), line 6 $244   You can deduct $244 on your return for the year if you itemize your deductions. Free efile for 2011 federal taxes You are considered to have paid this amount and can deduct it on your return even if, under the contract, you did not have to reimburse the seller. Free efile for 2011 federal taxes Delinquent taxes. Free efile for 2011 federal taxes   Delinquent taxes are unpaid taxes that were imposed on the seller for an earlier tax year. Free efile for 2011 federal taxes If you agree to pay delinquent taxes when you buy your home, you cannot deduct them. Free efile for 2011 federal taxes You treat them as part of the cost of your home. Free efile for 2011 federal taxes See Real estate taxes , later, under Basis. Free efile for 2011 federal taxes Escrow accounts. Free efile for 2011 federal taxes   Many monthly house payments include an amount placed in escrow (put in the care of a third party) for real estate taxes. Free efile for 2011 federal taxes You may not be able to deduct the total you pay into the escrow account. Free efile for 2011 federal taxes You can deduct only the real estate taxes that the lender actually paid from escrow to the taxing authority. Free efile for 2011 federal taxes Your real estate tax bill will show this amount. Free efile for 2011 federal taxes Refund or rebate of real estate taxes. Free efile for 2011 federal taxes   If you receive a refund or rebate of real estate taxes this year for amounts you paid this year, you must reduce your real estate tax deduction by the amount refunded to you. Free efile for 2011 federal taxes If the refund or rebate was for real estate taxes paid for a prior year, you may have to include some or all of the refund in your income. Free efile for 2011 federal taxes For more information, see Recoveries in Publication 525, Taxable and Nontaxable Income. Free efile for 2011 federal taxes Items You Cannot Deduct as Real Estate Taxes The following items are not deductible as real estate taxes. Free efile for 2011 federal taxes Charges for services. Free efile for 2011 federal taxes   An itemized charge for services to specific property or people is not a tax, even if the charge is paid to the taxing authority. Free efile for 2011 federal taxes You cannot deduct the charge as a real estate tax if it is: A unit fee for the delivery of a service (such as a $5 fee charged for every 1,000 gallons of water you use), A periodic charge for a residential service (such as a $20 per month or $240 annual fee charged for trash collection), or A flat fee charged for a single service provided by your local government (such as a $30 charge for mowing your lawn because it had grown higher than permitted under a local ordinance). Free efile for 2011 federal taxes    You must look at your real estate tax bill to decide if any nondeductible itemized charges, such as those listed above, are included in the bill. Free efile for 2011 federal taxes If your taxing authority (or lender) does not furnish you a copy of your real estate tax bill, ask for it. Free efile for 2011 federal taxes Contact the taxing authority if you need additional information about a specific charge on your real estate tax bill. Free efile for 2011 federal taxes Assessments for local benefits. Free efile for 2011 federal taxes   You cannot deduct amounts you pay for local benefits that tend to increase the value of your property. Free efile for 2011 federal taxes Local benefits include the construction of streets, sidewalks, or water and sewer systems. Free efile for 2011 federal taxes You must add these amounts to the basis of your property. Free efile for 2011 federal taxes   You can, however, deduct assessments (or taxes) for local benefits if they are for maintenance, repair, or interest charges related to those benefits. Free efile for 2011 federal taxes An example is a charge to repair an existing sidewalk and any interest included in that charge. Free efile for 2011 federal taxes   If only a part of the assessment is for maintenance, repair, or interest charges, you must be able to show the amount of that part to claim the deduction. Free efile for 2011 federal taxes If you cannot show what part of the assessment is for maintenance, repair, or interest charges, you cannot deduct any of it. Free efile for 2011 federal taxes   An assessment for a local benefit may be listed as an item in your real estate tax bill. Free efile for 2011 federal taxes If so, use the rules in this section to find how much of it, if any, you can deduct. Free efile for 2011 federal taxes Transfer taxes (or stamp taxes). Free efile for 2011 federal taxes   You cannot deduct transfer taxes and similar taxes and charges on the sale of a personal home. Free efile for 2011 federal taxes If you are the buyer and you pay them, include them in the cost basis of the property. Free efile for 2011 federal taxes If you are the seller and you pay them, they are expenses of the sale and reduce the amount realized on the sale. Free efile for 2011 federal taxes Homeowners association assessments. Free efile for 2011 federal taxes   You cannot deduct these assessments because the homeowners association, rather than a state or local government, imposes them. Free efile for 2011 federal taxes Special Rules for Cooperatives If you own a cooperative apartment, some special rules apply to you, though you generally receive the same tax treatment as other homeowners. Free efile for 2011 federal taxes As an owner of a cooperative apartment, you own shares of stock in a corporation that owns or leases housing facilities. Free efile for 2011 federal taxes You can deduct your share of the corporation's deductible real estate taxes if the cooperative housing corporation meets the following conditions: The corporation has only one class of stock outstanding, Each stockholder, solely because of ownership of the stock, can live in a house, apartment, or house trailer owned or leased by the corporation, No stockholder can receive any distribution out of capital, except on a partial or complete liquidation of the corporation, and At least one of the following: At least 80% of the corporation's gross income for the tax year was paid by the tenant-stockholders. Free efile for 2011 federal taxes For this purpose, gross income means all income received during the entire tax year, including any received before the corporation changed to cooperative ownership. Free efile for 2011 federal taxes At least 80% of the total square footage of the corporation's property must be available for use by the tenant-stockholders during the entire tax year. Free efile for 2011 federal taxes At least 90% of the expenditures paid or incurred by the corporation were used for the acquisition, construction, management, maintenance, or care of the property for the benefit of the tenant-shareholders during the entire tax year. Free efile for 2011 federal taxes Tenant-stockholders. Free efile for 2011 federal taxes   A tenant-stockholder can be any entity (such as a corporation, trust, estate, partnership, or association) as well as an individual. Free efile for 2011 federal taxes The tenant-stockholder does not have to live in any of the cooperative's dwelling units. Free efile for 2011 federal taxes The units that the tenant-stockholder has the right to occupy can be rented to others. Free efile for 2011 federal taxes Deductible taxes. Free efile for 2011 federal taxes   You figure your share of real estate taxes in the following way. Free efile for 2011 federal taxes Divide the number of your shares of stock by the total number of shares outstanding, including any shares held by the corporation. Free efile for 2011 federal taxes Multiply the corporation's deductible real estate taxes by the number you figured in (1). Free efile for 2011 federal taxes This is your share of the real estate taxes. Free efile for 2011 federal taxes   Generally, the corporation will tell you your share of its real estate tax. Free efile for 2011 federal taxes This is the amount you can deduct if it reasonably reflects the cost of real estate taxes for your dwelling unit. Free efile for 2011 federal taxes Refund of real estate taxes. Free efile for 2011 federal taxes   If the corporation receives a refund of real estate taxes it paid in an earlier year, it must reduce the amount of real estate taxes paid this year when it allocates the tax expense to you. Free efile for 2011 federal taxes Your deduction for real estate taxes the corporation paid this year is reduced by your share of the refund the corporation received. Free efile for 2011 federal taxes Sales Taxes Generally, you can elect to deduct state and local general sales taxes instead of state and local income taxes as an itemized deduction on Schedule A (Form 1040). Free efile for 2011 federal taxes Deductible sales taxes may include sales taxes paid on your home (including mobile and prefabricated), or home building materials if the tax rate was the same as the general sales tax rate. Free efile for 2011 federal taxes For information on figuring your deduction, see the Instructions for Schedule A (Form 1040). Free efile for 2011 federal taxes If you elect to deduct the sales taxes paid on your home, or home building materials, you cannot include them as part of your cost basis in the home. Free efile for 2011 federal taxes Home Mortgage Interest This section of the publication gives you basic information about home mortgage interest, including information on interest paid at settlement, points, and Form 1098, Mortgage Interest Statement. Free efile for 2011 federal taxes Most home buyers take out a mortgage (loan) to buy their home. Free efile for 2011 federal taxes They then make monthly payments to either the mortgage holder or someone collecting the payments for the mortgage holder. Free efile for 2011 federal taxes Usually, you can deduct the entire part of your payment that is for mortgage interest, if you itemize your deductions on Schedule A (Form 1040). Free efile for 2011 federal taxes However, your deduction may be limited if: Your total mortgage balance is more than $1 million ($500,000 if married filing separately), or You took out a mortgage for reasons other than to buy, build, or improve your home. Free efile for 2011 federal taxes If either of these situations applies to you, see Publication 936 for more information. Free efile for 2011 federal taxes Also see Publication 936 if you later refinance your mortgage or buy a second home. Free efile for 2011 federal taxes Refund of home mortgage interest. Free efile for 2011 federal taxes   If you receive a refund of home mortgage interest that you deducted in an earlier year and that reduced your tax, you generally must include the refund in income in the year you receive it. Free efile for 2011 federal taxes For more information, see Recoveries in Publication 525. Free efile for 2011 federal taxes The amount of the refund will usually be shown on the mortgage interest statement you receive from your mortgage lender. Free efile for 2011 federal taxes See Mortgage Interest Statement , later. Free efile for 2011 federal taxes Deductible Mortgage Interest To be deductible, the interest you pay must be on a loan secured by your main home or a second home. Free efile for 2011 federal taxes The loan can be a first or second mortgage, a home improvement loan, or a home equity loan. Free efile for 2011 federal taxes Prepaid interest. Free efile for 2011 federal taxes   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. Free efile for 2011 federal taxes Generally, you can deduct in each year only the interest that qualifies as home mortgage interest for that year. Free efile for 2011 federal taxes An exception (discussed later) applies to points. Free efile for 2011 federal taxes Late payment charge on mortgage payment. Free efile for 2011 federal taxes   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. Free efile for 2011 federal taxes Mortgage prepayment penalty. Free efile for 2011 federal taxes   If you pay off your home mortgage early, you may have to pay a penalty. Free efile for 2011 federal taxes 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. Free efile for 2011 federal taxes Ground rent. Free efile for 2011 federal taxes   In some states (such as Maryland), you may buy your home subject to a ground rent. Free efile for 2011 federal taxes A ground rent is an obligation you assume to pay a fixed amount per year on the property. Free efile for 2011 federal taxes Under this arrangement, you are leasing (rather than buying) the land on which your home is located. Free efile for 2011 federal taxes Redeemable ground rents. Free efile for 2011 federal taxes   If you make annual or periodic rental payments on a redeemable ground rent, you can deduct the payments as mortgage interest. Free efile for 2011 federal taxes The ground rent is a redeemable ground rent only if all of the following are true. Free efile for 2011 federal taxes Your lease, including renewal periods, is for more than 15 years. Free efile for 2011 federal taxes You can freely assign the lease. Free efile for 2011 federal taxes You have a present or future right (under state or local law) to end the lease and buy the lessor's entire interest in the land by paying a specified amount. Free efile for 2011 federal taxes The lessor's interest in the land is primarily a security interest to protect the rental payments to which he or she is entitled. Free efile for 2011 federal taxes   Payments made to end the lease and buy the lessor's entire interest in the land are not redeemable ground rents. Free efile for 2011 federal taxes You cannot deduct them. Free efile for 2011 federal taxes Nonredeemable ground rents. Free efile for 2011 federal taxes   Payments on a nonredeemable ground rent are not mortgage interest. Free efile for 2011 federal taxes You can deduct them as rent only if they are a business expense or if they are for rental property. Free efile for 2011 federal taxes Cooperative apartment. Free efile for 2011 federal taxes   You can usually treat the interest on a loan you took out to buy stock in a cooperative housing corporation as home mortgage interest if you own a cooperative apartment, and the cooperative housing corporation meets the conditions described earlier under Special Rules for Cooperatives . Free efile for 2011 federal taxes In addition, you can treat as home mortgage interest your share of the corporation's deductible mortgage interest. Free efile for 2011 federal taxes Figure your share of mortgage interest the same way that is shown for figuring your share of real estate taxes in the Example under Division of real estate taxes, earlier. Free efile for 2011 federal taxes For more information on cooperatives, see Special Rule for Tenant-Stockholders in Cooperative Housing Corporations in Publication 936. Free efile for 2011 federal taxes Refund of cooperative's mortgage interest. Free efile for 2011 federal taxes   You must reduce your mortgage interest deduction by your share of any cash portion of a patronage dividend that the cooperative receives. Free efile for 2011 federal taxes The patronage dividend is a partial refund to the cooperative housing corporation of mortgage interest it paid in a prior year. Free efile for 2011 federal taxes   If you receive a Form 1098 from the cooperative housing corporation, the form should show only the amount you can deduct. Free efile for 2011 federal taxes Mortgage Interest Paid at Settlement One item that normally appears on a settlement or closing statement is home mortgage interest. Free efile for 2011 federal taxes You can deduct the interest that you pay at settlement if you itemize your deductions on Schedule A (Form 1040). Free efile for 2011 federal taxes This amount should be included in the mortgage interest statement provided by your lender. Free efile for 2011 federal taxes See the discussion under Mortgage Interest Statement , later. Free efile for 2011 federal taxes Also, if you pay interest in advance, see Prepaid interest , earlier, and Points , next. Free efile for 2011 federal taxes Points The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. Free efile for 2011 federal taxes Points also may be called loan origination fees, maximum loan charges, loan discount, or discount points. Free efile for 2011 federal taxes A borrower is treated as paying any points that a home seller pays for the borrower's mortgage. Free efile for 2011 federal taxes See Points paid by the seller , later. Free efile for 2011 federal taxes General rule. Free efile for 2011 federal taxes   You cannot deduct the full amount of points in the year paid. Free efile for 2011 federal taxes They are prepaid interest, so you generally must deduct them over the life (term) of the mortgage. Free efile for 2011 federal taxes Exception. Free efile for 2011 federal taxes   You can deduct the full amount of points in the year paid if you meet all the following tests. Free efile for 2011 federal taxes Your loan is secured by your main home. Free efile for 2011 federal taxes (Generally, your main home is the one you live in most of the time. Free efile for 2011 federal taxes ) Paying points is an established business practice in the area where the loan was made. Free efile for 2011 federal taxes The points paid were not more than the points generally charged in that area. Free efile for 2011 federal taxes You use the cash method of accounting. Free efile for 2011 federal taxes This means you report income in the year you receive it and deduct expenses in the year you pay them. Free efile for 2011 federal taxes Most individuals use this method. Free efile for 2011 federal taxes The points were not paid in place of amounts that ordinarily are stated separately on the settlement statement, such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes. Free efile for 2011 federal taxes The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. Free efile for 2011 federal taxes The funds you provided are not required to have been applied to the points. Free efile for 2011 federal taxes They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. Free efile for 2011 federal taxes You cannot have borrowed these funds. Free efile for 2011 federal taxes You use your loan to buy or build your main home. Free efile for 2011 federal taxes The points were computed as a percentage of the principal amount of the mortgage. Free efile for 2011 federal taxes The amount is clearly shown on the settlement statement (such as the Uniform Settlement Statement, Form HUD-1) as points charged for the mortgage. Free efile for 2011 federal taxes The points may be shown as paid from either your funds or the seller's. Free efile for 2011 federal taxes Note. Free efile for 2011 federal taxes If you meet all of the tests listed above and you itemize your deductions in the year you get the loan, you can either deduct the full amount of points in the year paid or deduct them over the life of the loan, beginning in the year you get the loan. Free efile for 2011 federal taxes If you do not itemize your deductions in the year you get the loan, you can spread the points over the life of the loan and deduct the appropriate amount in each future year, if any, when you do itemize your deductions. Free efile for 2011 federal taxes Home improvement loan. Free efile for 2011 federal taxes   You can also fully deduct in the year paid points paid on a loan to improve your main home, if you meet the first six tests listed earlier. Free efile for 2011 federal taxes Refinanced loan. Free efile for 2011 federal taxes   If you use part of the refinanced mortgage proceeds to improve your main home and you meet the first six tests listed earlier, you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds. Free efile for 2011 federal taxes You can deduct the rest of the points over the life of the loan. Free efile for 2011 federal taxes Points not fully deductible in year paid. Free efile for 2011 federal taxes    If you do not qualify under the exception to deduct the full amount of points in the year paid (or choose not to do so), see Points in Publication 936 for the rules on when and how much you can deduct. Free efile for 2011 federal taxes Figure A. Free efile for 2011 federal taxes   You can use Figure A, next, as a quick guide to see whether your points are fully deductible in the year paid. Free efile for 2011 federal taxes    Please click here for the text description of the image. Free efile for 2011 federal taxes Figure A. Free efile for 2011 federal taxes Are my points fully deductible this year? Amounts charged for services. Free efile for 2011 federal taxes   Amounts charged by the lender for specific services connected to the loan are not interest. Free efile for 2011 federal taxes Examples of these charges are: Appraisal fees, Notary fees, and Preparation costs for the mortgage note or deed of trust. Free efile for 2011 federal taxes You cannot deduct these amounts as points either in the year paid or over the life of the mortgage. Free efile for 2011 federal taxes For information about the tax treatment of these amounts and other settlement fees and closing costs, see Basis , later. Free efile for 2011 federal taxes Points paid by the seller. Free efile for 2011 federal taxes   The term “points” includes loan placement fees that the seller pays to the lender to arrange financing for the buyer. Free efile for 2011 federal taxes Treatment by seller. Free efile for 2011 federal taxes   The seller cannot deduct these fees as interest. Free efile for 2011 federal taxes However, they are a selling expense that reduces the seller's amount realized. Free efile for 2011 federal taxes See Publication 523 for more information. Free efile for 2011 federal taxes Treatment by buyer. Free efile for 2011 federal taxes   The buyer treats seller-paid points as if he or she had paid them. Free efile for 2011 federal taxes If all the tests listed earlier under Exception are met, the buyer can deduct the points in the year paid. Free efile for 2011 federal taxes If any of those tests are not met, the buyer must deduct the points over the life of the loan. Free efile for 2011 federal taxes   The buyer must also reduce the basis of the home by the amount of the seller-paid points. Free efile for 2011 federal taxes For more information about the basis of your home, see Basis , later. Free efile for 2011 federal taxes Funds provided are less than points. Free efile for 2011 federal taxes   If you meet all the tests listed earlier under Exception except that the funds you provided were less than the points charged to you (test 6), you can deduct the points in the year paid up to the amount of funds you provided. Free efile for 2011 federal taxes In addition, you can deduct any points paid by the seller. Free efile for 2011 federal taxes Example 1. Free efile for 2011 federal taxes When you took out a $100,000 mortgage loan to buy your home in December, you were charged one point ($1,000). Free efile for 2011 federal taxes You meet all the tests for deducting points in the year paid (see Exception , earlier), except the only funds you provided were a $750 down payment. Free efile for 2011 federal taxes Of the $1,000 you were charged for points, you can deduct $750 in the year paid. Free efile for 2011 federal taxes You spread the remaining $250 over the life of the mortgage. Free efile for 2011 federal taxes Example 2. Free efile for 2011 federal taxes The facts are the same as in Example 1 , except that the person who sold you your home also paid one point ($1,000) to help you get your mortgage. Free efile for 2011 federal taxes In the year paid, you can deduct $1,750 ($750 of the amount you were charged plus the $1,000 paid by the seller). Free efile for 2011 federal taxes You spread the remaining $250 over the life of the mortgage. Free efile for 2011 federal taxes You must reduce the basis of your home by the $1,000 paid by the seller. Free efile for 2011 federal taxes Excess points. Free efile for 2011 federal taxes   If you meet all the tests under Exception , earlier, except that the points paid were more than are generally charged in your area (test 3), you can deduct in the year paid only the points that are generally charged. Free efile for 2011 federal taxes You must spread any additional points over the life of the mortgage. Free efile for 2011 federal taxes Mortgage ending early. Free efile for 2011 federal taxes   If you spread your deduction for points over the life of the mortgage, you can deduct any remaining balance in the year the mortgage ends. Free efile for 2011 federal taxes A mortgage may end early due to a prepayment, refinancing, foreclosure, or similar event. Free efile for 2011 federal taxes Example. Free efile for 2011 federal taxes Dan paid $3,000 in points in 2006 that he had to spread out over the 15-year life of the mortgage. Free efile for 2011 federal taxes He had deducted $1,400 of these points through 2012. Free efile for 2011 federal taxes Dan prepaid his mortgage in full in 2013. Free efile for 2011 federal taxes He can deduct the remaining $1,600 of points in 2013. Free efile for 2011 federal taxes Exception. Free efile for 2011 federal taxes   If you refinance the mortgage with the same lender, you cannot deduct any remaining points for the year. Free efile for 2011 federal taxes Instead, deduct them over the term of the new loan. Free efile for 2011 federal taxes Form 1098. Free efile for 2011 federal taxes   The mortgage interest statement you receive should show not only the total interest paid during the year, but also your deductible points paid during the year. Free efile for 2011 federal taxes See Mortgage Interest Statement , later. Free efile for 2011 federal taxes Where To Deduct Home Mortgage Interest Enter on Schedule A (Form 1040), line 10, the home mortgage interest and points reported to you on Form 1098 (discussed next). Free efile for 2011 federal taxes If you did not receive a Form 1098, enter your deductible interest on line 11, and any deductible points on line 12. Free efile for 2011 federal taxes See Table 1 below for a summary of where to deduct home mortgage interest and real estate taxes. Free efile for 2011 federal taxes If you paid home mortgage interest to the person from whom you bought your home, show that person's name, address, and social security number (SSN) or employer identification number (EIN) on the dotted lines next to line 11. Free efile for 2011 federal taxes The seller must give you this number and you must give the seller your SSN. Free efile for 2011 federal taxes Form W-9, Request for Taxpayer Identification Number and Certification, can be used for this purpose. Free efile for 2011 federal taxes Failure to meet either of these requirements may result in a $50 penalty for each failure. Free efile for 2011 federal taxes Table 1. Free efile for 2011 federal taxes Where To Deduct Interest and Taxes Paid on Your Home See the text for information on what expenses are eligible. Free efile for 2011 federal taxes IF you are eligible to deduct . Free efile for 2011 federal taxes . Free efile for 2011 federal taxes . Free efile for 2011 federal taxes THEN report the amount  on Schedule A (Form 1040) . Free efile for 2011 federal taxes . Free efile for 2011 federal taxes . Free efile for 2011 federal taxes real estate taxes line 6. Free efile for 2011 federal taxes home mortgage interest and points reported on Form 1098 line 10. Free efile for 2011 federal taxes home mortgage interest not reported on  Form 1098 line 11. Free efile for 2011 federal taxes points not reported on Form 1098 line 12. Free efile for 2011 federal taxes qualified mortgage insurance premiums line 13. Free efile for 2011 federal taxes Mortgage Interest Statement If you paid $600 or more of mortgage interest (including certain points and mortgage insurance premiums) during the year on any one mortgage to a mortgage holder in the course of that holder's trade or business, you should receive a Form 1098 or similar statement from the mortgage holder. Free efile for 2011 federal taxes The statement will show the total interest paid on your mortgage during the year. Free efile for 2011 federal taxes If you bought a main home during the year, it also will show the deductible points you paid and any points you can deduct that were paid by the person who sold you your home. Free efile for 2011 federal taxes See Points , earlier. Free efile for 2011 federal taxes The interest you paid at settlement should be included on the statement. Free efile for 2011 federal taxes If it is not, add the interest from the settlement sheet that qualifies as home mortgage interest to the total shown on Form 1098 or similar statement. Free efile for 2011 federal taxes Put the total on Schedule A (Form 1040), line 10, and attach a statement to your return explaining the difference. Free efile for 2011 federal taxes Write “See attached” to the right of line 10. Free efile for 2011 federal taxes A mortgage holder can be a financial institution, a governmental unit, or a cooperative housing corporation. Free efile for 2011 federal taxes If a statement comes from a cooperative housing corporation, it generally will show your share of interest. Free efile for 2011 federal taxes Your mortgage interest statement for 2013 should be provided or sent to you by January 31, 2014. Free efile for 2011 federal taxes If it is mailed, you should allow adequate time to receive it before contacting the mortgage holder. Free efile for 2011 federal taxes A copy of this form will be sent to the IRS also. Free efile for 2011 federal taxes Example. Free efile for 2011 federal taxes You bought a new home on May 3. Free efile for 2011 federal taxes You paid no points on the purchase. Free efile for 2011 federal taxes During the year, you made mortgage payments which included $4,480 deductible interest on your new home. Free efile for 2011 federal taxes The settlement sheet for the purchase of the home included interest of $620 for 29 days in May. Free efile for 2011 federal taxes The mortgage statement you receive from the lender includes total interest of $5,100 ($4,480 + $620). Free efile for 2011 federal taxes You can deduct the $5,100 if you itemize your deductions. Free efile for 2011 federal taxes Refund of overpaid interest. Free efile for 2011 federal taxes   If you receive a refund of mortgage interest you overpaid in a prior year, you generally will receive a Form 1098 showing the refund in box 3. Free efile for 2011 federal taxes Generally, you must include the refund in income in the year you receive it. Free efile for 2011 federal taxes See Refund of home mortgage interest , earlier, under Home Mortgage Interest. Free efile for 2011 federal taxes More than one borrower. Free efile for 2011 federal taxes   If you and at least one other person (other than your spouse if you file a joint return) were liable for and paid interest on a mortgage that was for your home, and the other person received a Form 1098 showing the interest that was paid during the year, attach a statement to your return explaining this. Free efile for 2011 federal taxes Show how much of the interest each of you paid, and give the name and address of the person who received the form. Free efile for 2011 federal taxes Deduct your share of the interest on Schedule A (Form 1040), line 11, and write “See attached” to the right of that line. Free efile for 2011 federal taxes Mortgage Insurance Premiums You may be able to take an itemized deduction on Schedule A (Form 1040), line 13, for premiums you pay or accrue during 2013 for qualified mortgage insurance in connection with home acquisition debt on your qualified home. Free efile for 2011 federal taxes Mortgage insurance premiums you paid or accrued on any mortgage insurance contract issued before January 1, 2007, are not deductible as an itemized deduction. Free efile for 2011 federal taxes Qualified Mortgage Insurance Qualified mortgage insurance is mortgage insurance provided by the Veterans Administration, the Federal Housing Administration, or the Rural Housing Administration, and private mortgage insurance (as defined in section 2 of the Homeowners Protection Act of 1998 as in effect on December 20, 2006). Free efile for 2011 federal taxes Prepaid mortgage insurance premiums. Free efile for 2011 federal taxes   If you paid premiums that are allocable to periods after 2013, you must allocate them over the shorter of: The stated term of the mortgage, or 84 months, beginning with the month the insurance was obtained. Free efile for 2011 federal taxes The premiums are treated as paid in the year to which they were allocated. Free efile for 2011 federal taxes If the mortgage is satisfied before its term, no deduction is allowed for the unamortized balance. Free efile for 2011 federal taxes See Publication 936 for details. Free efile for 2011 federal taxes Exception for certain mortgage insurance. Free efile for 2011 federal taxes   The allocation rules, explained above, do not apply to qualified mortgage insurance provided by the Department of Veterans Affairs or Rural Housing Service. Free efile for 2011 federal taxes Home Acquisition Debt Home acquisition debt is a mortgage you took out after October 13, 1987, to buy, build, or substantially improve a qualified home. Free efile for 2011 federal taxes It also must be secured by that home. Free efile for 2011 federal taxes If the amount of your mortgage is more than the cost of the home plus the cost of any substantial improvements, only the debt that is not more than the cost of the home plus improvements qualifies as home acquisition debt. Free efile for 2011 federal taxes Home acquisition debt limit. Free efile for 2011 federal taxes   The total amount you can treat as home acquisition debt at any time on your home cannot be more than $1 million ($500,000 if married filing separately). Free efile for 2011 federal taxes Discharges of qualified principal residence indebtedness. Free efile for 2011 federal taxes   You can exclude from gross income any discharges of qualified principal residence indebtedness made after 2006 and before 2014. Free efile for 2011 federal taxes You must reduce the basis of your principal residence (but not below zero) by the amount you exclude. Free efile for 2011 federal taxes Principal residence. Free efile for 2011 federal taxes   Your principal residence is the home where you ordinarily live most of the time. Free efile for 2011 federal taxes You can have only one principal residence at any one time. Free efile for 2011 federal taxes Qualified principal residence indebtedness. Free efile for 2011 federal taxes   This is a mortgage that you took out to buy, build, or substantially improve your principal residence and that is secured by that residence. Free efile for 2011 federal taxes If the amount of your original mortgage is more than the cost of your principal residence plus the cost of substantial improvements, qualified principal residence indebtedness cannot be more than the cost of your principal residence plus improvements. Free efile for 2011 federal taxes   Any debt secured by your principal residence that you use to refinance qualified principal residence indebtedness is qualified principal residence indebtedness up to the amount of your old mortgage principal just before the refinancing. Free efile for 2011 federal taxes Additional debt incurred to substantially improve your principal residence is also qualified principal residence indebtedness. Free efile for 2011 federal taxes Amount you can exclude. Free efile for 2011 federal taxes   You can only exclude debt discharged after 2006 and before 2014. Free efile for 2011 federal taxes The most you can exclude is $2 million ($1 million if married filing separately). Free efile for 2011 federal taxes You cannot exclude any amount that was discharged because of services performed for the lender or on account of any other factor not directly related either to a decline in the value of your residence or to your financial condition. Free efile for 2011 federal taxes Ordering rule. Free efile for 2011 federal taxes   If only a part of a loan is qualified principal residence indebtedness, you can exclude only the amount of the discharge that is more than the amount of the loan (immediately before the discharge) that is not qualified principal residence indebtedness. Free efile for 2011 federal taxes Qualified Home This means your main home or your second home. Free efile for 2011 federal taxes A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities. Free efile for 2011 federal taxes Main home. Free efile for 2011 federal taxes   You can have only one main home at any one time. Free efile for 2011 federal taxes This is the home where you ordinarily live most of the time. Free efile for 2011 federal taxes Second home and other special situations. Free efile for 2011 federal taxes   If you have a second home, use part of your home for other than residential living (such as a home office), rent out part of your home, or are having your home constructed, see Qualified Home in Publication 936. Free efile for 2011 federal taxes Limit on Deduction If your adjusted gross income (AGI) on Form 1040, line 38, is more than $100,000 ($50,000 if your filing status is married filing separately), the amount of your mortgage insurance premiums that are deductible is reduced and may be eliminated. Free efile for 2011 federal taxes See Line 13 in the instructions for Schedule A (Form 1040) and complete the Mortgage Insurance Premiums Deduction Worksheet to figure the amount you can deduct. Free efile for 2011 federal taxes If your AGI is more than $109,000 ($54,500 if married filing separately), you cannot deduct your mortgage insurance premiums. Free efile for 2011 federal taxes Form 1098. Free efile for 2011 federal taxes   The amount of mortgage insurance premiums you paid during 2013 should be reported in box 4. Free efile for 2011 federal taxes See Form 1098, Mortgage Interest Statement in Publication 936. Free efile for 2011 federal taxes Mortgage Interest Credit The mortgage interest credit is intended to help lower-income individuals afford home ownership. Free efile for 2011 federal taxes If you qualify, you can claim the credit on Form 8396 each year for part of the home mortgage interest you pay. Free efile for 2011 federal taxes Who qualifies. Free efile for 2011 federal taxes   You may be eligible for the credit if you were issued a qualified Mortgage Credit Certificate (MCC) from your state or local government. Free efile for 2011 federal taxes Generally, an MCC is issued only in connection with a new mortgage for the purchase of your main home. Free efile for 2011 federal taxes The MCC will show the certificate credit rate you will use to figure your credit. Free efile for 2011 federal taxes It also will show the certified indebtedness amount. Free efile for 2011 federal taxes Only the interest on that amount qualifies for the credit. Free efile for 2011 federal taxes See Figuring the Credit , later. Free efile for 2011 federal taxes You must contact the appropriate government agency about getting an MCC before you get a mortgage and buy your home. Free efile for 2011 federal taxes Contact your state or local housing finance agency for information about the availability of MCCs in your area. Free efile for 2011 federal taxes How to claim the credit. Free efile for 2011 federal taxes   To claim the credit, complete Form 8396 and attach it to your Form 1040 or Form 1040NR, U. Free efile for 2011 federal taxes S. Free efile for 2011 federal taxes Nonresident Alien Income Tax Return. Free efile for 2011 federal taxes Include the credit in your total for Form 1040, line 53, or Form 1040NR, line 50; be sure to check box c and write “Form 8396” on that line. Free efile for 2011 federal taxes Reducing your home mortgage interest deduction. Free efile for 2011 federal taxes   If you itemize your deductions on Schedule A (Form 1040), you must reduce your home mortgage interest deduction by the amount of the mortgage interest credit shown on Form 8396, line 3. Free efile for 2011 federal taxes You must do this even if part of that amount is to be carried forward to 2014. Free efile for 2011 federal taxes Selling your home. Free efile for 2011 federal taxes   If you purchase a home after 1990 using an MCC, and you sell that home within 9 years, you may have to recapture (repay) all or part of the benefit you received from the MCC program. Free efile for 2011 federal taxes For additional information, see Recapturing (Paying Back) a Federal Mortgage Subsidy, in Publication 523. Free efile for 2011 federal taxes Figuring the Credit Figure your credit on Form 8396. Free efile for 2011 federal taxes Mortgage not more than certified indebtedness. Free efile for 2011 federal taxes   If your mortgage loan amount is equal to (or smaller than) the certified indebtedness amount shown on your MCC, enter on Form 8396, line 1, all the interest you paid on your mortgage during the year. Free efile for 2011 federal taxes Mortgage more than certified indebtedness. Free efile for 2011 federal taxes   If your mortgage loan amount is larger than the certified indebtedness amount shown on your MCC, you can figure the credit on only part of the interest you paid. Free efile for 2011 federal taxes To find the amount to enter on line 1, multiply the total interest you paid during the year on your mortgage by the following fraction. Free efile for 2011 federal taxes Certified indebtedness amount on your MCC Original amount of your mortgage   The fraction will not change as long as you are entitled to take the mortgage interest credit. Free efile for 2011 federal taxes Example. Free efile for 2011 federal taxes Emily bought a home this year. Free efile for 2011 federal taxes Her mortgage loan is $125,000. Free efile for 2011 federal taxes The certified indebtedness amount on her MCC is $100,000. Free efile for 2011 federal taxes She paid $7,500 interest this year. Free efile for 2011 federal taxes Emily figures the interest to enter on Form 8396, line 1, as follows:   $100,000 = 80% (. Free efile for 2011 federal taxes 80)       $125,000       $7,500 x . Free efile for 2011 federal taxes 80 = $6,000   Emily enters $6,000 on Form 8396, line 1. Free efile for 2011 federal taxes In each later year, she will figure her credit using only 80% of the interest she pays for that year. Free efile for 2011 federal taxes Limits Two limits may apply to your credit. Free efile for 2011 federal taxes A limit based on the credit rate, and A limit based on your tax. Free efile for 2011 federal taxes Limit based on credit rate. Free efile for 2011 federal taxes   If the certificate credit rate is higher than 20%, the credit you are allowed cannot be more than $2,000. Free efile for 2011 federal taxes Limit based on tax. Free efile for 2011 federal taxes   After applying the limit based on the credit rate, your credit generally cannot be more than your tax liability. Free efile for 2011 federal taxes See the Credit Limit Worksheet in the Form 8396 instructions to calculate the limit based on tax. Free efile for 2011 federal taxes Dividing the Credit If two or more persons (other than a married couple filing a joint return) hold an interest in the home to which the MCC relates, the credit must be divided based on the interest held by each person. Free efile for 2011 federal taxes Example. Free efile for 2011 federal taxes John and his brother, George, were issued an MCC. Free efile for 2011 federal taxes They used it to get a mortgage on their main home. Free efile for 2011 federal taxes John has a 60% ownership interest in the home, and George has a 40% ownership interest in the home. Free efile for 2011 federal taxes John paid $5,400 mortgage interest this year and George paid $3,600. Free efile for 2011 federal taxes The MCC shows a credit rate of 25% and a certified indebtedness amount of $130,000. Free efile for 2011 federal taxes The loan amount (mortgage) on their home is $120,000. Free efile for 2011 federal taxes The credit is limited to $2,000 because the credit rate is more than 20%. Free efile for 2011 federal taxes John figures the credit by multiplying the mortgage interest he paid this year ($5,400) by the certificate credit rate (25%) for a total of $1,350. Free efile for 2011 federal taxes His credit is limited to $1,200 ($2,000 × 60%). Free efile for 2011 federal taxes George figures the credit by multiplying the mortgage interest he paid this year ($3,600) by the certificate credit rate (25%) for a total of $900. Free efile for 2011 federal taxes His credit is limited to $800 ($2,000 × 40%). Free efile for 2011 federal taxes Carryforward If your allowable credit is reduced because of the limit based on your tax, you can carry forward the unused portion of the credit to the next 3 years or until used, whichever comes first. Free efile for 2011 federal taxes Example. Free efile for 2011 federal taxes You receive a mortgage credit certificate from State X. Free efile for 2011 federal taxes This year, your regular tax liability is $1,100, you owe no alternative minimum tax, and your mortgage interest credit is $1,700. Free efile for 2011 federal taxes You claim no other credits. Free efile for 2011 federal taxes Your unused mortgage interest credit for this year is $600 ($1,700 − $1,100). Free efile for 2011 federal taxes You can carry forward this amount to the next 3 years or until used, whichever comes first. Free efile for 2011 federal taxes Credit rate more than 20%. Free efile for 2011 federal taxes   If you are subject to the $2,000 limit because your certificate credit rate is more than 20%, you cannot carry forward any amount more than $2,000 (or your share of the $2,000 if you must divide the credit). Free efile for 2011 federal taxes Example. Free efile for 2011 federal taxes In the earlier example under Dividing the Credit , John and George used the entire $2,000 credit. Free efile for 2011 federal taxes The excess   John $1,350 − $1,200 = $150     George $900 − $800 = $100   $150 for John ($1,350 − $1,200) and $100 for George ($900 − $800) cannot be carried forward to future years, despite the respective tax liabilities for John and George. Free efile for 2011 federal taxes Refinancing If you refinance your original mortgage loan on which you had been given an MCC, you must get a new MCC to be able to claim the credit on the new loan. Free efile for 2011 federal taxes The amount of credit you can claim on the new loan may change. Free efile for 2011 federal taxes Table 2 below summarizes how to figure your credit if you refinance your original mortgage loan. Free efile for 2011 federal taxes Table 2. Free efile for 2011 federal taxes Effect of Refinancing on Your Credit IF you get a new (reissued) MCC and the amount of your new mortgage is . Free efile for 2011 federal taxes . Free efile for 2011 federal taxes . Free efile for 2011 federal taxes THEN the interest you claim on Form 8396, line 1, is* . Free efile for 2011 federal taxes . Free efile for 2011 federal taxes . Free efile for 2011 federal taxes smaller than or equal to the certified indebtedness amount on the new MCC all the interest paid during the year on your new mortgage. Free efile for 2011 federal taxes larger than the certified indebtedness amount on the new MCC interest paid during the year on your new mortgage multiplied by the following fraction. Free efile for 2011 federal taxes         certified indebtedness  amount on your new MCC       original amount of your  mortgage   *The credit using the new MCC cannot be more than the credit using the old MCC. Free efile for 2011 federal taxes  See New MCC cannot increase your credit above. Free efile for 2011 federal taxes An issuer may reissue an MCC after you refinance your mortgage. Free efile for 2011 federal taxes If you did not get a new MCC, you may want to contact the state or local housing finance agency that issued your original MCC for information about whether you can get a reissued MCC. Free efile for 2011 federal taxes Year of refinancing. Free efile for 2011 federal taxes   In the year of refinancing, add the applicable amount of interest paid on the old mortgage and the applicable amount of interest paid on the new mortgage, and enter the total on Form 8396, line 1. Free efile for 2011 federal taxes   If your new MCC has a credit rate different from the rate on the old MCC, you must attach a statement to Form 8396. Free efile for 2011 federal taxes The statement must show the calculation for lines 1, 2, and 3 for the part of the year when the old MCC was in effect. Free efile for 2011 federal taxes It must show a separate calculation for the part of the year when the new MCC was in effect. Free efile for 2011 federal taxes Combine the amounts from both calculations for line 3, enter the total on line 3 of the form, and write “See attached” on the dotted line next to line 2. Free efile for 2011 federal taxes New MCC cannot increase your credit. Free efile for 2011 federal taxes   The credit that you claim with your new MCC cannot be more than the credit that you could have claimed with your old MCC. Free efile for 2011 federal taxes   In most cases, the agency that issues your new MCC will make sure that it does not increase your credit. Free efile for 2011 federal taxes However, if either your old loan or your new loan has a variable (adjustable) interest rate, you will need to check this yourself. Free efile for 2011 federal taxes In that case, you will need to know the amount of the credit you could have claimed using the old MCC. Free efile for 2011 federal taxes   There are two methods for figuring the credit you could have claimed. Free efile for 2011 federal taxes Under one method, you figure the actual credit that would have been allowed. Free efile for 2011 federal taxes This means you use the credit rate on the old MCC and the interest you would have paid on the old loan. Free efile for 2011 federal taxes   If your old loan was a variable rate mortgage, you can use another method to determine the credit that you could have claimed. Free efile for 2011 federal taxes Under this method, you figure the credit using a payment schedule of a hypothetical self-amortizing mortgage with level payments projected to the final maturity date of the old mortgage. Free efile for 2011 federal taxes The interest rate of the hypothetical mortgage is the annual percentage rate (APR) of the new mortgage for purposes of the Federal Truth in Lending Act. Free efile for 2011 federal taxes The principal of the hypothetical mortgage is the remaining outstanding balance of the certified mortgage indebtedness shown on the old MCC. Free efile for 2011 federal taxes    You must choose one method and use it consistently beginning with the first tax year for which you claim the credit based on the new MCC. Free efile for 2011 federal taxes    As part of your tax records, you should keep your old MCC and the schedule of payments for your old mortgage. Free efile for 2011 federal taxes Basis Basis is your starting point for figuring a gain or loss if you later sell your home, or for figuring depreciation if you later use part of your home for business purposes or for rent. Free efile for 2011 federal taxes While you own your home, you may add certain items to your basis. Free efile for 2011 federal taxes You may subtract certain other items from your basis. Free efile for 2011 federal taxes These items are called adjustments to basis and are explained later under Adjusted Basis . Free efile for 2011 federal taxes It is important that you understand these terms when you first acquire your home because you must keep track of your basis and adjusted basis during the period you own your home. Free efile for 2011 federal taxes You also must keep records of the events that affect basis or adjusted basis. Free efile for 2011 federal taxes See Keeping Records , below. Free efile for 2011 federal taxes Figuring Your Basis How you figure your basis depends on how you acquire your home. Free efile for 2011 federal taxes If you buy or build your home, your cost is your basis. Free efile for 2011 federal taxes If you receive your home as a gift, your basis is usually the same as the adjusted basis of the person who gave you the property. Free efile for 2011 federal taxes If you inherit your home from a decedent, different rules apply depending on the date of the decedent's death. Free efile for 2011 federal taxes Each of these topics is discussed later. Free efile for 2011 federal taxes Property transferred from a spouse. Free efile for 2011 federal taxes   If your home is transferred to you from your spouse, or from your former spouse as a result of a divorce, your basis is the same as your spouse's (or former spouse's) adjusted basis just before the transfer. Free efile for 2011 federal taxes Publication 504, Divorced or Separated Individuals, fully discusses transfers between spouses. Free efile for 2011 federal taxes Cost as Basis The cost of your home, whether you purchased it or constructed it, is the amount you paid for it, including any debt you assumed. Free efile for 2011 federal taxes The cost of your home includes most settlement or closing costs you paid when you bought the home. Free efile for 2011 federal taxes If you built your home, your cost includes most closing costs paid when you bought the land or settled on your mortgage. Free efile for 2011 federal taxes See Settlement or closing costs , later. Free efile for 2011 federal taxes If you elect to deduct the sales taxes on the purchase or construction of your home as an itemized deduction on Schedule A (Form 1040), you cannot include the sales taxes as part of your cost basis in the home. Free efile for 2011 federal taxes Purchase. Free efile for 2011 federal taxes   The basis of a home you bought is the amount you paid for it. Free efile for 2011 federal taxes This usually includes your down payment and any debt you assumed. Free efile for 2011 federal taxes The basis of a cooperative apartment is the amount you paid for your shares in the corporation that owns or controls the property. Free efile for 2011 federal taxes This amount includes any purchase commissions or other costs of acquiring the shares. Free efile for 2011 federal taxes Construction. Free efile for 2011 federal taxes   If you contracted to have your home built on land that you own, your basis in the home is your basis in the land plus the amount you paid to have the home built. Free efile for 2011 federal taxes This includes the cost of labor and materials, the amount you paid the contractor, any architect's fees, building permit charges, utility meter and connection charges, and legal fees that are directly connected with building your home. Free efile for 2011 federal taxes If you built all or part of your home yourself, your basis is the total amount it cost you to build it. Free efile for 2011 federal taxes You cannot include in basis the value of your own labor or any other labor for which you did not pay. Free efile for 2011 federal taxes Real estate taxes. Free efile for 2011 federal taxes   Real estate taxes are usually divided so that you and the seller each pay taxes for the part of the property tax year that each owned the home. Free efile for 2011 federal taxes See the earlier discussion of Real estate taxes paid at settlement or closing , under Real Estate Taxes, earlier, to figure the real estate taxes you paid or are considered to have paid. Free efile for 2011 federal taxes   If you pay any part of the seller's share of the real estate taxes (the taxes up to the date of sale), and the seller did not reimburse you, add those taxes to your basis in the home. Free efile for 2011 federal taxes You cannot deduct them as taxes paid. Free efile for 2011 federal taxes   If the seller paid any of your share of the real estate taxes (the taxes beginning with the date of sale), you can still deduct those taxes. Free efile for 2011 federal taxes Do not include those taxes in your basis. Free efile for 2011 federal taxes If you did not reimburse the seller, you must reduce your basis by the amount of those taxes. Free efile for 2011 federal taxes Example 1. Free efile for 2011 federal taxes You bought your home on September 1. Free efile for 2011 federal taxes The property tax year in your area is the calendar year, and the tax is due on August 15. Free efile for 2011 federal taxes The real estate taxes on the home you bought were $1,275 for the year and had been paid by the seller on August 15. Free efile for 2011 federal taxes You did not reimburse the seller for your share of the real estate taxes from September 1 through December 31. Free efile for 2011 federal taxes You must reduce the basis of your home by the $426 [(122 ÷ 365) × $1,275] the seller paid for you. Free efile for 2011 federal taxes You can deduct your $426 share of real estate taxes on your return for the year you purchased your home. Free efile for 2011 federal taxes Example 2. Free efile for 2011 federal taxes You bought your home on May 3, 2013. Free efile for 2011 federal taxes The property tax year in your area is the calendar year. Free efile for 2011 federal taxes The taxes for the previous year are assessed on January 2 and are due on May 31 and November 30. Free efile for 2011 federal taxes Under state law, the taxes become a lien on May 31. Free efile for 2011 federal taxes You agreed to pay all taxes due after the date of sale. Free efile for 2011 federal taxes The taxes due in 2013 for 2012 were $1,375. Free efile for 2011 federal taxes The taxes due in 2014 for 2013 will be $1,425. Free efile for 2011 federal taxes You cannot deduct any of the taxes paid in 2013 because they relate to the 2012 property tax year and you did not own the home until 2013. Free efile for 2011 federal taxes Instead, you add the $1,375 to the cost (basis) of your home. Free efile for 2011 federal taxes You owned the home in 2013 for 243 days (May 3 to December 31), so you can take a tax deduction on your 2014 return of $949 [(243 ÷ 365) × $1,425] paid in 2014 for 2013. Free efile for 2011 federal taxes You add the remaining $476 ($1,425 − $949) of taxes paid in 2014 to the cost (basis) of your home. Free efile for 2011 federal taxes Settlement or closing costs. Free efile for 2011 federal taxes   If you bought your home, you probably paid settlement or closing costs in addition to the contract price. Free efile for 2011 federal taxes These costs are divided between you and the seller according to the sales contract, local custom, or understanding of the parties. Free efile for 2011 federal taxes If you built your home, you probably paid these costs when you bought the land or settled on your mortgage. Free efile for 2011 federal taxes   The only settlement or closing costs you can deduct are home mortgage interest and certain real estate taxes. Free efile for 2011 federal taxes You deduct them in the year you buy your home if you itemize your deductions. Free efile for 2011 federal taxes You can add certain other settlement or closing costs to the basis of your home. Free efile for 2011 federal taxes Items added to basis. Free efile for 2011 federal taxes   You can include in your basis the settlement fees and closing costs you paid for buying your home. Free efile for 2011 federal taxes A fee is for buying the home if you would have had to pay it even if you paid cash for the home. Free efile for 2011 federal taxes   The following are some of the settlement fees and closing costs that you can include in the original basis of your home. Free efile for 2011 federal taxes Abstract fees (abstract of title fees). Free efile for 2011 federal taxes Charges for installing utility services. Free efile for 2011 federal taxes Legal fees (including fees for the title search and preparation of the sales contract and deed). Free efile for 2011 federal taxes Recording fees. Free efile for 2011 federal taxes Surveys. Free efile for 2011 federal taxes Transfer or stamp taxes. Free efile for 2011 federal taxes Owner's title insurance. Free efile for 2011 federal taxes Any amount the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, cost for improvements or repairs, and sales commissions. Free efile for 2011 federal taxes   If the seller actually paid for any item for which you are liable and for which you can take a deduction (such as your share of the real estate taxes for the year of sale), you must reduce your basis by that amount unless you are charged for it in the settlement. Free efile for 2011 federal taxes Items not added to basis and not deductible. Free efile for 2011 federal taxes   Here are some settlement and closing costs that you cannot deduct or add to your basis. Free efile for 2011 federal taxes Fire insurance premiums. Free efile for 2011 federal taxes Charges for using utilities or other services related to occupancy of the home before closing. Free efile for 2011 federal taxes Rent for occupying the home before closing. Free efile for 2011 federal taxes Charges connected with getting or refinancing a mortgage loan, such as: Loan assumption fees, Cost of a credit report, and Fee for an appraisal required by a lender. Free efile for 2011 federal taxes Points paid by seller. Free efile for 2011 federal taxes   If you bought your home after April 3, 1994, you must reduce your basis by any points paid for your mortgage by the person who sold you your home. Free efile for 2011 federal taxes   If you bought your home after 1990 but before April 4, 1994, you must reduce your basis by seller-paid points only if you deducted them. Free efile for 2011 federal taxes See Points , earlier, for the rules on deducting points. Free efile for 2011 federal taxes Gift To figure the basis of property you receive as a gift, you must know its adjusted basis (defined later) to the donor just before it was given to you, its fair market value (FMV) at the time it was given to you, and any gift tax paid on it. Free efile for 2011 federal taxes Fair market value. Free efile for 2011 federal taxes   Fair market value (FMV) is the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and who both have a reasonable knowledge of all the necessary facts. Free efile for 2011 federal taxes Donor's adjusted basis is more than FMV. Free efile for 2011 federal taxes   If someone gave you your home and the donor's adjusted basis, when it was given to you, was more than the FMV, your basis at the time of receipt is the same as the donor's adjusted basis. Free efile for 2011 federal taxes Disposition basis. Free efile for 2011 federal taxes   If the donor's adjusted basis at the time of the gift is more than the FMV, your basis (plus or minus any required adjustments, see Adjusted Basis , later) when you dispose of the property will depend on whether you have a gain or a loss. Free efile for 2011 federal taxes Your basis for figuring a gain is the same as the donor's adjusted basis. Free efile for 2011 federal taxes Your basis for figuring a loss is the FMV when you received the gift. Free efile for 2011 federal taxes If you use the donor's adjusted basis to figure a gain and it results in a loss, then you must use the FMV (at the time of the gift) to refigure the loss. Free efile for 2011 federal taxes However, if using the FMV results in a gain, then you neither have a gain nor a loss. Free efile for 2011 federal taxes Example 1. Free efile for 2011 federal taxes Andrew received a house as a gift from Ishmael (the donor). Free efile for 2011 federal taxes At the time of the gift, the home had an FMV of $80,000. Free efile for 2011 federal taxes Ishmael's adjusted basis was $100,000. Free efile for 2011 federal taxes After he received the house, no events occurred to increase or decrease the basis. Free efile for 2011 federal taxes If Andrew sells the house for $120,000, he will have a $20,000 gain because he must use the donor's adjusted basis ($100,000) at the time of the gift as his basis to figure the gain. Free efile for 2011 federal taxes Example 2. Free efile for 2011 federal taxes Same facts as Example 1 , except this time Andrew sells the house for $70,000. Free efile for 2011 federal taxes He will have a loss of $10,000 because he must use the FMV ($80,000) at the time of the gift as his basis to figure the loss. Free efile for 2011 federal taxes Example 3. Free efile for 2011 federal taxes Same facts as Example 1 , except this time Andrew sells the house for $90,000. Free efile for 2011 federal taxes Initially, he figures the gain using Ishmael's adjusted basis ($100,000), which results in a loss of $10,000. Free efile for 2011 federal taxes Since it is a loss, Andrew must now recalculate the loss using the FMV ($80,000), which results in a gain of $10,000. Free efile for 2011 federal taxes So in this situation, Andrew will neither have a gain nor a loss. Free efile for 2011 federal taxes Donor's adjusted basis equal to or less than the FMV. Free efile for 2011 federal taxes   If someone gave you your home after 1976 and the donor's adjusted basis, when it was given to you, was equal to or less than the FMV, your basis at the time of receipt is the same as the donor's adjusted basis, plus the part of any federal gift tax paid that is due to the net increase in value of the home. Free efile for 2011 federal taxes Part of federal gift tax due to net increase in value. Free efile for 2011 federal taxes   Figure the part of the federal gift tax paid that is due to the net increase in value of the home by multiplying the total federal gift tax paid by a fraction. Free efile for 2011 federal taxes The numerator (top part) of the fraction is the net increase in the value of the home, and the denominator (bottom part) is the value of the home for gift tax purposes after reduction for any annual exclusion and marital or charitable deduction that applies to the gift. Free efile for 2011 federal taxes The net increase in the value of the home is its FMV minus the adjusted basis of the donor. Free efile for 2011 federal taxes Publication 551 gives more information, including examples, on figuring your basis when you receive property as a gift. Free efile for 2011 federal taxes Inheritance Your basis in a home you inherited is generally the fair market value of the home on the date of the decedent's death or on the alternative valuation date if the personal representative for the estate chooses to use alternative valuation. Free efile for 2011 federal taxes If an estate tax return was filed, your basis is generally the value of the home listed on the estate tax return. Free efile for 2011 federal taxes If an estate tax return was not filed, your basis is the appraised value of the home at the decedent's date of death for state inheritance or transmission taxes. Free efile for 2011 federal taxes Publication 551 and Publication 559, Survivors, Executors, and Administrators, have more information on the basis of inherited property. Free efile for 2011 federal taxes If you inherited your home from someone who died in 2010, and the executor of the decedent's estate made the election to file Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent, refer to the information provided by the executor or see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010. Free efile for 2011 federal taxes Adjusted Basis While you own your home, various events may take place that can change the original basis of your home. Free efile for 2011 federal taxes These events can increase or decrease your original basis. Free efile for 2011 federal taxes The result is called adjusted basis. Free efile for 2011 federal taxes See Table 3, on this page, for a list of some of the items that can adjust your basis. Free efile for 2011 federal taxes Table 3. Free efile for 2011 federal taxes Adjusted Basis This table lists examples of some items that generally will increase or decrease your basis in your home. Free efile for 2011 federal taxes It is not intended to be all-inclusive. Free efile for 2011 federal taxes Increases to Basis Decreases to Basis Improvements: Putting an addition on your home Replacing an entire roof Paving your driveway Installing central air conditioning Rewiring your home Assessments for local improvements (see Assessments for local benefits , under What You Can and Cannot Deduct, earlier) Amounts spent to restore damaged property Insurance or other reimbursement for casualty losses Deductible casualty loss not covered by insurance Payments received for easement or right-of-way granted Depreciation allowed or allowable if home is used for business or rental purposes Value of subsidy for energy conservation measure excluded from income Improvements. Free efile for 2011 federal taxes   An improvement materially adds to the value of your home, considerably prolongs its useful life, or adapts it to new uses. Free efile for 2011 federal taxes You must add the cost of any improvements to the basis of your home. Free efile for 2011 federal taxes You cannot deduct these costs. Free efile for 2011 federal taxes   Improvements include putting a recreation room in your unfinished basement, adding another bathroom or bedroom, putting up a fence, putting in new plumbing or wiring, installing a new roof, and paving your driveway. Free efile for 2011 federal taxes Amount added to basis. Free efile for 2011 federal taxes   The amount you add to your basis for improvements is your actual cost. Free efile for 2011 federal taxes This includes all costs for material and labor, except your own labor, and all expenses related to the improvement. Free efile for 2011 federal taxes For example, if you had your lot surveyed to put up a fence, the cost of the survey is a part of the cost of the fence. Free efile for 2011 federal taxes   You also must add to your basis state and local assessments for improvements such as streets and sidewalks if they increase the value of the property. Free efile for 2011 federal taxes These assessments are discussed earlier under Real Estate Taxes . Free efile for 2011 federal taxes Improvements no longer part of home. Free efile for 2011 federal taxes    Your home's adjusted basis does not include the cost of any improvements that are replaced and are no longer part of the home. Free efile for 2011 federal taxes Example. Free efile for 2011 federal taxes You put wall-to-wall carpeting in your home 15 years ago. Free efile for 2011 federal taxes Later, you replaced that carpeting with new wall-to-wall carpeting. Free efile for 2011 federal taxes The cost of the old carpeting you replaced is no longer part of your home's adjusted basis. Free efile for 2011 federal taxes Repairs versus improvements. Free efile for 2011 federal taxes   A repair keeps your home in an ordinary, efficient operating condition. Free efile for 2011 federal taxes It does not add to the value of your home or prolong its life. Free efile for 2011 federal taxes Repairs include repainting your home inside or outside, fixing your gutters or floors, fixing leaks or plastering, and replacing broken window panes. Free efile for 2011 federal taxes You cannot deduct repair costs and generally cannot add them to the basis of your home. Free efile for 2011 federal taxes   However, repairs that are done as part of an extensive remodeling or restoration of your home are considered improvements. Free efile for 2011 federal taxes You add them to the basis of your home. Free efile for 2011 federal taxes Records to keep. Free efile for 2011 federal taxes   You can use Table 4 (at the end of the publication) as a guide to help you keep track of improvements to your home. Free efile for 2011 federal taxes Also see Keeping Records , below. Free efile for 2011 federal taxes Energy conservation subsidy. Free efile for 2011 federal taxes   If a public utility gives you (directly or indirectly) a subsidy for the purchase or installation of an energy conservation measure for your home, do not include the value of that subsidy in your income. Free efile for 2011 federal taxes You must reduce the basis of your home by that value. Free efile for 2011 federal taxes   An energy conservation measure is an installation or modification primarily designed to reduce consumption of electricity or natural gas or to improve the management of energy demand. Free efile for 2011 federal taxes Keeping Records Keeping full and accurate records is vital to properly report your income and expenses, to support your deductions and credits, and to know the basis or adjusted basis of your home. Free efile for 2011 federal taxes These records include your purchase contract and settlement papers if you bought the property, or other objective evidence if you acquired it by gift, inheritance, or similar means. Free efile for 2011 federal taxes You should keep any receipts, canceled checks, and similar evidence for improvements or other additions to the basis. Free efile for 2011 federal taxes In addition, you should keep track of any decreases to the basis such as those listed in Table 3, earlier. Free efile for 2011 federal taxes How to keep records. Free efile for 2011 federal taxes   How you keep records is up to you, but they must be clear and accurate and must be available to the IRS. Free efile for 2011 federal taxes How long to keep records. Free efile for 2011 federal taxes   You must keep your records for as long as they are important for meeting any provision of the federal tax law. Free efile for 2011 federal taxes   Keep records that support an item of income, a deduction, or a credit appearing on a return until the period of limitations for the return runs out. Free efile for 2011 federal taxes (A period of limitations is the period of time after which no legal action can be brought. Free efile for 2011 federal taxes ) For assessment of tax you owe, this is generally 3 years from the date you filed the return. Free efile for 2011 federal taxes For filing a claim for credit or refund, this is generally 3 years from the date you filed the original return, or 2 years from the date you paid the tax, whichever is later. Free efile for 2011 federal taxes Returns filed before the due date are treated as filed on the due date. Free efile for 2011 federal taxes   You may need to keep records relating to the basis of property (discussed earlier) for longer than the period of limitations. Free efile for 2011 federal taxes Keep those records as long as they are important in figuring the basis of the original or replacement property. Free efile for 2011 federal taxes Generally, this means for as long as you own the property and, after you dispose of it, for the period of limitations that applies to you. Free efile for 2011 federal taxes Table 4. Free efile for 2011 federal taxes Record of Home Improvements Keep this for your records. Free efile for 2011 federal taxes Also, keep receipts or other proof of improvements. Free efile for 2011 federal taxes Remove from this record any improvements that are no longer part of your main home. Free efile for 2011 federal taxes For example, if you put wall-to-wall carpeting in your home and later replace it with new wall-to-wall carpeting, remove the cost of the first carpeting. Free efile for 2011 federal taxes (a) Type of Improvement (b) Date (c) Amount   (a) Type of Improvement (b) Date (c) Amount Additions:       Heating & Air  Conditioning:     Bedroom       Heating system     Bathroom       Central air conditioning     Deck       Furnace     Garage       Duct work     Porch       Central humidifier     Patio       Filtration system     Storage shed       Other     Fireplace       Electrical:     Other           Lawn & Grounds:       Lighting fixtures           Wiring upgrades     Landscaping       Other     Driveway       Plumbing:     Walkway           Fences       Water heater     Retaining wall       Soft water system     Sprinkler system       Filtration system     Swimming pool       Other     Exterior lighting       Insulation:     Other           Communications:       Attic           Walls     Satellite dish       Floors     Intercom       Pipes and duct work     Security system       Other     Other             Miscellaneous:       Interior  Improvements:     Storm windows and doors       Built-in appliances     Roof       Kitchen modernization     Central vacuum       Bathroom modernization     Other       Flooring             Wall-to-wall carpeting             Other     How To