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Self Employed Taxes

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Self Employed Taxes

Self employed taxes It's easy, accurate and fast. So why would you file your taxes any other way? Self employed taxes Old fashioned paper tax forms have been around for decades, but it might be time for them to go the way of the dodo. Who wants to wait for weeks to get their check in the mail when you can just efile your tax return electronically with the IRS and start enjoying your refund in as little as 7 days. Self employed taxes If you consider the money the IRS holds on to while you wait for your refund as an interest free loan, then you’ll realize that you are losing money. No one other than the IRS can get an interest free loan and that doesn’t seem fair, does it? Enter the internet age. Commercial companies have been moving online for years now - when was the last time you've mailed a check or received a paper statement from your bank? Now, even the government sites are starting to get with the program and are offering quick and easy efile to everyone. Here are a few reasons why I switched to efile; maybe it’s time you do to!
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Abusive Tax Schemes - Criminal Investigation (CI)

Overview - Abusive Tax Schemes
Since the mid-1990s, the IRS has witnessed a proliferation of abusive tax schemes, particularly those with offshore components. 

What are some of the Most Common Abusive Tax Schemes?
The most common abusive tax schemes involve numerous domestic and foreign trusts, partnerships, or nominees.

How Does the Taxpayer Access the Funds in Offshore Accounts? - Abusive Tax Schemes
There are two methods commonly used to get funds back to the taxpayers. They are through credit/debit cards and fraudulent loans. 

In Partnership - IRS Criminal and Civil Enforcement and Department of Justice - Abusive Tax Schemes
Parallel civil and criminal investigations are an effective and aggressive approach that halts these schemes quickly and permanently.

Civil and Criminal Penalties - Abusive Tax Schemes
Investors of abusive tax schemes that improperly evade tax are still liable for taxes, interest, and civil penalties.

Statistical Data - Abusive Tax Schemes
Enforcement statistics on investigations initiated, prosecutions recommended, indictments, sentenced, and months to serve in prison.

Examples of Abusive Tax Scheme
Examples have been written from public record documents filed in the district courts where the case was prosecuted.

 


Criminal Enforcement Home Page

How to Report Suspected Tax Fraud Activities

Page Last Reviewed or Updated: 30-Oct-2013

The Self Employed Taxes

Self employed 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. Self employed taxes S. Self employed taxes Individual Income Tax Return, and itemize your deductions on Schedule A (Form 1040). Self employed taxes If you itemize, you cannot take the standard deduction. Self employed taxes This section explains what expenses you can deduct as a homeowner. Self employed taxes It also points out expenses that you cannot deduct. Self employed taxes There are four primary discussions: real estate taxes, sales taxes, home mortgage interest, and mortgage insurance premiums. Self employed taxes Generally, your real estate taxes, home mortgage interest, and mortgage insurance premiums are included in your house payment. Self employed taxes Your house payment. Self employed taxes   If you took out a mortgage (loan) to finance the purchase of your home, you probably have to make monthly house payments. Self employed taxes Your house payment may include several costs of owning a home. Self employed 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. Self employed taxes These are discussed in more detail later. Self employed 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. Self employed taxes Minister's or military housing allowance. Self employed 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. Self employed taxes You do not have to reduce your deductions by your nontaxable allowance. Self employed 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. Self employed taxes Nondeductible payments. Self employed taxes   You cannot deduct any of the following items. Self employed taxes Insurance (other than mortgage insurance premiums), including fire and comprehensive coverage, and title insurance. Self employed taxes Wages you pay for domestic help. Self employed taxes Depreciation. Self employed taxes The cost of utilities, such as gas, electricity, or water. Self employed taxes Most settlement costs. Self employed taxes See Settlement or closing costs under Cost as Basis, later, for more information. Self employed taxes Forfeited deposits, down payments, or earnest money. Self employed 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. Self employed 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. Self employed 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. Self employed 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). Self employed 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. Self employed taxes Real Estate Taxes Most state and local governments charge an annual tax on the value of real property. Self employed taxes This is called a real estate tax. Self employed taxes You can deduct the tax if it is assessed uniformly at a like rate on all real property throughout the community. Self employed 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. Self employed taxes Deductible Real Estate Taxes You can deduct real estate taxes imposed on you. Self employed 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. Self employed taxes If you own a cooperative apartment, see Special Rules for Cooperatives , later. Self employed taxes Where to deduct real estate taxes. Self employed taxes   Enter the amount of your deductible real estate taxes on Schedule A (Form 1040), line 6. Self employed taxes Real estate taxes paid at settlement or closing. Self employed 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. Self employed taxes Your share of these taxes is fully deductible if you itemize your deductions. Self employed taxes Division of real estate taxes. Self employed taxes   For federal income tax purposes, the seller is treated as paying the property taxes up to, but not including, the date of sale. Self employed taxes You (the buyer) are treated as paying the taxes beginning with the date of sale. Self employed taxes This applies regardless of the lien dates under local law. Self employed taxes Generally, this information is included on the settlement statement you get at closing. Self employed 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. Self employed taxes You each can deduct your own share, if you itemize deductions, for the year the property is sold. Self employed taxes Example. Self employed taxes You bought your home on September 1. Self employed taxes The property tax year (the period to which the tax relates) in your area is the calendar year. Self employed taxes The tax for the year was $730 and was due and paid by the seller on August 15. Self employed taxes You owned your new home during the property tax year for 122 days (September 1 to December 31, including your date of purchase). Self employed taxes You figure your deduction for real estate taxes on your home as follows. Self employed taxes 1. Self employed taxes Enter the total real estate taxes for the real property tax year $730 2. Self employed taxes Enter the number of days in the property tax year that you owned the property 122 3. Self employed taxes Divide line 2 by 365 . Self employed taxes 3342 4. Self employed taxes Multiply line 1 by line 3. Self employed taxes This is your deduction. Self employed 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. Self employed 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. Self employed taxes Delinquent taxes. Self employed taxes   Delinquent taxes are unpaid taxes that were imposed on the seller for an earlier tax year. Self employed taxes If you agree to pay delinquent taxes when you buy your home, you cannot deduct them. Self employed taxes You treat them as part of the cost of your home. Self employed taxes See Real estate taxes , later, under Basis. Self employed taxes Escrow accounts. Self employed taxes   Many monthly house payments include an amount placed in escrow (put in the care of a third party) for real estate taxes. Self employed taxes You may not be able to deduct the total you pay into the escrow account. Self employed taxes You can deduct only the real estate taxes that the lender actually paid from escrow to the taxing authority. Self employed taxes Your real estate tax bill will show this amount. Self employed taxes Refund or rebate of real estate taxes. Self employed 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. Self employed 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. Self employed taxes For more information, see Recoveries in Publication 525, Taxable and Nontaxable Income. Self employed taxes Items You Cannot Deduct as Real Estate Taxes The following items are not deductible as real estate taxes. Self employed taxes Charges for services. Self employed 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. Self employed 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). Self employed 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. Self employed taxes If your taxing authority (or lender) does not furnish you a copy of your real estate tax bill, ask for it. Self employed taxes Contact the taxing authority if you need additional information about a specific charge on your real estate tax bill. Self employed taxes Assessments for local benefits. Self employed taxes   You cannot deduct amounts you pay for local benefits that tend to increase the value of your property. Self employed taxes Local benefits include the construction of streets, sidewalks, or water and sewer systems. Self employed taxes You must add these amounts to the basis of your property. Self employed taxes   You can, however, deduct assessments (or taxes) for local benefits if they are for maintenance, repair, or interest charges related to those benefits. Self employed taxes An example is a charge to repair an existing sidewalk and any interest included in that charge. Self employed 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. Self employed taxes If you cannot show what part of the assessment is for maintenance, repair, or interest charges, you cannot deduct any of it. Self employed taxes   An assessment for a local benefit may be listed as an item in your real estate tax bill. Self employed taxes If so, use the rules in this section to find how much of it, if any, you can deduct. Self employed taxes Transfer taxes (or stamp taxes). Self employed taxes   You cannot deduct transfer taxes and similar taxes and charges on the sale of a personal home. Self employed taxes If you are the buyer and you pay them, include them in the cost basis of the property. Self employed taxes If you are the seller and you pay them, they are expenses of the sale and reduce the amount realized on the sale. Self employed taxes Homeowners association assessments. Self employed taxes   You cannot deduct these assessments because the homeowners association, rather than a state or local government, imposes them. Self employed 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. Self employed taxes As an owner of a cooperative apartment, you own shares of stock in a corporation that owns or leases housing facilities. Self employed 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. Self employed 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. Self employed 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. Self employed 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. Self employed taxes Tenant-stockholders. Self employed taxes   A tenant-stockholder can be any entity (such as a corporation, trust, estate, partnership, or association) as well as an individual. Self employed taxes The tenant-stockholder does not have to live in any of the cooperative's dwelling units. Self employed taxes The units that the tenant-stockholder has the right to occupy can be rented to others. Self employed taxes Deductible taxes. Self employed taxes   You figure your share of real estate taxes in the following way. Self employed taxes Divide the number of your shares of stock by the total number of shares outstanding, including any shares held by the corporation. Self employed taxes Multiply the corporation's deductible real estate taxes by the number you figured in (1). Self employed taxes This is your share of the real estate taxes. Self employed taxes   Generally, the corporation will tell you your share of its real estate tax. Self employed taxes This is the amount you can deduct if it reasonably reflects the cost of real estate taxes for your dwelling unit. Self employed taxes Refund of real estate taxes. Self employed 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. Self employed taxes Your deduction for real estate taxes the corporation paid this year is reduced by your share of the refund the corporation received. Self employed 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). Self employed 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. Self employed taxes For information on figuring your deduction, see the Instructions for Schedule A (Form 1040). Self employed 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. Self employed 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. Self employed taxes Most home buyers take out a mortgage (loan) to buy their home. Self employed taxes They then make monthly payments to either the mortgage holder or someone collecting the payments for the mortgage holder. Self employed 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). Self employed 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. Self employed taxes If either of these situations applies to you, see Publication 936 for more information. Self employed taxes Also see Publication 936 if you later refinance your mortgage or buy a second home. Self employed taxes Refund of home mortgage interest. Self employed 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. Self employed taxes For more information, see Recoveries in Publication 525. Self employed taxes The amount of the refund will usually be shown on the mortgage interest statement you receive from your mortgage lender. Self employed taxes See Mortgage Interest Statement , later. Self employed 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. Self employed taxes The loan can be a first or second mortgage, a home improvement loan, or a home equity loan. Self employed taxes Prepaid interest. Self employed 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. Self employed taxes Generally, you can deduct in each year only the interest that qualifies as home mortgage interest for that year. Self employed taxes An exception (discussed later) applies to points. Self employed taxes Late payment charge on mortgage payment. Self employed 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. Self employed taxes Mortgage prepayment penalty. Self employed taxes   If you pay off your home mortgage early, you may have to pay a penalty. Self employed 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. Self employed taxes Ground rent. Self employed taxes   In some states (such as Maryland), you may buy your home subject to a ground rent. Self employed taxes A ground rent is an obligation you assume to pay a fixed amount per year on the property. Self employed taxes Under this arrangement, you are leasing (rather than buying) the land on which your home is located. Self employed taxes Redeemable ground rents. Self employed taxes   If you make annual or periodic rental payments on a redeemable ground rent, you can deduct the payments as mortgage interest. Self employed taxes The ground rent is a redeemable ground rent only if all of the following are true. Self employed taxes Your lease, including renewal periods, is for more than 15 years. Self employed taxes You can freely assign the lease. Self employed 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. Self employed 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. Self employed taxes   Payments made to end the lease and buy the lessor's entire interest in the land are not redeemable ground rents. Self employed taxes You cannot deduct them. Self employed taxes Nonredeemable ground rents. Self employed taxes   Payments on a nonredeemable ground rent are not mortgage interest. Self employed taxes You can deduct them as rent only if they are a business expense or if they are for rental property. Self employed taxes Cooperative apartment. Self employed 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 . Self employed taxes In addition, you can treat as home mortgage interest your share of the corporation's deductible mortgage interest. Self employed 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. Self employed taxes For more information on cooperatives, see Special Rule for Tenant-Stockholders in Cooperative Housing Corporations in Publication 936. Self employed taxes Refund of cooperative's mortgage interest. Self employed taxes   You must reduce your mortgage interest deduction by your share of any cash portion of a patronage dividend that the cooperative receives. Self employed taxes The patronage dividend is a partial refund to the cooperative housing corporation of mortgage interest it paid in a prior year. Self employed taxes   If you receive a Form 1098 from the cooperative housing corporation, the form should show only the amount you can deduct. Self employed taxes Mortgage Interest Paid at Settlement One item that normally appears on a settlement or closing statement is home mortgage interest. Self employed taxes You can deduct the interest that you pay at settlement if you itemize your deductions on Schedule A (Form 1040). Self employed taxes This amount should be included in the mortgage interest statement provided by your lender. Self employed taxes See the discussion under Mortgage Interest Statement , later. Self employed taxes Also, if you pay interest in advance, see Prepaid interest , earlier, and Points , next. Self employed taxes Points The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. Self employed taxes Points also may be called loan origination fees, maximum loan charges, loan discount, or discount points. Self employed taxes A borrower is treated as paying any points that a home seller pays for the borrower's mortgage. Self employed taxes See Points paid by the seller , later. Self employed taxes General rule. Self employed taxes   You cannot deduct the full amount of points in the year paid. Self employed taxes They are prepaid interest, so you generally must deduct them over the life (term) of the mortgage. Self employed taxes Exception. Self employed taxes   You can deduct the full amount of points in the year paid if you meet all the following tests. Self employed taxes Your loan is secured by your main home. Self employed taxes (Generally, your main home is the one you live in most of the time. Self employed taxes ) Paying points is an established business practice in the area where the loan was made. Self employed taxes The points paid were not more than the points generally charged in that area. Self employed taxes You use the cash method of accounting. Self employed taxes This means you report income in the year you receive it and deduct expenses in the year you pay them. Self employed taxes Most individuals use this method. Self employed 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. Self employed taxes The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. Self employed taxes The funds you provided are not required to have been applied to the points. Self employed taxes They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. Self employed taxes You cannot have borrowed these funds. Self employed taxes You use your loan to buy or build your main home. Self employed taxes The points were computed as a percentage of the principal amount of the mortgage. Self employed 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. Self employed taxes The points may be shown as paid from either your funds or the seller's. Self employed taxes Note. Self employed 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. Self employed 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. Self employed taxes Home improvement loan. Self employed 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. Self employed taxes Refinanced loan. Self employed 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. Self employed taxes You can deduct the rest of the points over the life of the loan. Self employed taxes Points not fully deductible in year paid. Self employed 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. Self employed taxes Figure A. Self employed taxes   You can use Figure A, next, as a quick guide to see whether your points are fully deductible in the year paid. Self employed taxes    Please click here for the text description of the image. Self employed taxes Figure A. Self employed taxes Are my points fully deductible this year? Amounts charged for services. Self employed taxes   Amounts charged by the lender for specific services connected to the loan are not interest. Self employed taxes Examples of these charges are: Appraisal fees, Notary fees, and Preparation costs for the mortgage note or deed of trust. Self employed taxes You cannot deduct these amounts as points either in the year paid or over the life of the mortgage. Self employed taxes For information about the tax treatment of these amounts and other settlement fees and closing costs, see Basis , later. Self employed taxes Points paid by the seller. Self employed taxes   The term “points” includes loan placement fees that the seller pays to the lender to arrange financing for the buyer. Self employed taxes Treatment by seller. Self employed taxes   The seller cannot deduct these fees as interest. Self employed taxes However, they are a selling expense that reduces the seller's amount realized. Self employed taxes See Publication 523 for more information. Self employed taxes Treatment by buyer. Self employed taxes   The buyer treats seller-paid points as if he or she had paid them. Self employed taxes If all the tests listed earlier under Exception are met, the buyer can deduct the points in the year paid. Self employed taxes If any of those tests are not met, the buyer must deduct the points over the life of the loan. Self employed taxes   The buyer must also reduce the basis of the home by the amount of the seller-paid points. Self employed taxes For more information about the basis of your home, see Basis , later. Self employed taxes Funds provided are less than points. Self employed 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. Self employed taxes In addition, you can deduct any points paid by the seller. Self employed taxes Example 1. Self employed taxes When you took out a $100,000 mortgage loan to buy your home in December, you were charged one point ($1,000). Self employed 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. Self employed taxes Of the $1,000 you were charged for points, you can deduct $750 in the year paid. Self employed taxes You spread the remaining $250 over the life of the mortgage. Self employed taxes Example 2. Self employed 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. Self employed 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). Self employed taxes You spread the remaining $250 over the life of the mortgage. Self employed taxes You must reduce the basis of your home by the $1,000 paid by the seller. Self employed taxes Excess points. Self employed 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. Self employed taxes You must spread any additional points over the life of the mortgage. Self employed taxes Mortgage ending early. Self employed 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. Self employed taxes A mortgage may end early due to a prepayment, refinancing, foreclosure, or similar event. Self employed taxes Example. Self employed taxes Dan paid $3,000 in points in 2006 that he had to spread out over the 15-year life of the mortgage. Self employed taxes He had deducted $1,400 of these points through 2012. Self employed taxes Dan prepaid his mortgage in full in 2013. Self employed taxes He can deduct the remaining $1,600 of points in 2013. Self employed taxes Exception. Self employed taxes   If you refinance the mortgage with the same lender, you cannot deduct any remaining points for the year. Self employed taxes Instead, deduct them over the term of the new loan. Self employed taxes Form 1098. Self employed 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. Self employed taxes See Mortgage Interest Statement , later. Self employed 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). Self employed taxes If you did not receive a Form 1098, enter your deductible interest on line 11, and any deductible points on line 12. Self employed taxes See Table 1 below for a summary of where to deduct home mortgage interest and real estate taxes. Self employed 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. Self employed taxes The seller must give you this number and you must give the seller your SSN. Self employed taxes Form W-9, Request for Taxpayer Identification Number and Certification, can be used for this purpose. Self employed taxes Failure to meet either of these requirements may result in a $50 penalty for each failure. Self employed taxes Table 1. Self employed taxes Where To Deduct Interest and Taxes Paid on Your Home See the text for information on what expenses are eligible. Self employed taxes IF you are eligible to deduct . Self employed taxes . Self employed taxes . Self employed taxes THEN report the amount  on Schedule A (Form 1040) . Self employed taxes . Self employed taxes . Self employed taxes real estate taxes line 6. Self employed taxes home mortgage interest and points reported on Form 1098 line 10. Self employed taxes home mortgage interest not reported on  Form 1098 line 11. Self employed taxes points not reported on Form 1098 line 12. Self employed taxes qualified mortgage insurance premiums line 13. Self employed 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. Self employed taxes The statement will show the total interest paid on your mortgage during the year. Self employed 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. Self employed taxes See Points , earlier. Self employed taxes The interest you paid at settlement should be included on the statement. Self employed 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. Self employed taxes Put the total on Schedule A (Form 1040), line 10, and attach a statement to your return explaining the difference. Self employed taxes Write “See attached” to the right of line 10. Self employed taxes A mortgage holder can be a financial institution, a governmental unit, or a cooperative housing corporation. Self employed taxes If a statement comes from a cooperative housing corporation, it generally will show your share of interest. Self employed taxes Your mortgage interest statement for 2013 should be provided or sent to you by January 31, 2014. Self employed taxes If it is mailed, you should allow adequate time to receive it before contacting the mortgage holder. Self employed taxes A copy of this form will be sent to the IRS also. Self employed taxes Example. Self employed taxes You bought a new home on May 3. Self employed taxes You paid no points on the purchase. Self employed taxes During the year, you made mortgage payments which included $4,480 deductible interest on your new home. Self employed taxes The settlement sheet for the purchase of the home included interest of $620 for 29 days in May. Self employed taxes The mortgage statement you receive from the lender includes total interest of $5,100 ($4,480 + $620). Self employed taxes You can deduct the $5,100 if you itemize your deductions. Self employed taxes Refund of overpaid interest. Self employed 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. Self employed taxes Generally, you must include the refund in income in the year you receive it. Self employed taxes See Refund of home mortgage interest , earlier, under Home Mortgage Interest. Self employed taxes More than one borrower. Self employed 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. Self employed taxes Show how much of the interest each of you paid, and give the name and address of the person who received the form. Self employed taxes Deduct your share of the interest on Schedule A (Form 1040), line 11, and write “See attached” to the right of that line. Self employed 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. Self employed 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. Self employed 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). Self employed taxes Prepaid mortgage insurance premiums. Self employed 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. Self employed taxes The premiums are treated as paid in the year to which they were allocated. Self employed taxes If the mortgage is satisfied before its term, no deduction is allowed for the unamortized balance. Self employed taxes See Publication 936 for details. Self employed taxes Exception for certain mortgage insurance. Self employed taxes   The allocation rules, explained above, do not apply to qualified mortgage insurance provided by the Department of Veterans Affairs or Rural Housing Service. Self employed 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. Self employed taxes It also must be secured by that home. Self employed 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. Self employed taxes Home acquisition debt limit. Self employed 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). Self employed taxes Discharges of qualified principal residence indebtedness. Self employed taxes   You can exclude from gross income any discharges of qualified principal residence indebtedness made after 2006 and before 2014. Self employed taxes You must reduce the basis of your principal residence (but not below zero) by the amount you exclude. Self employed taxes Principal residence. Self employed taxes   Your principal residence is the home where you ordinarily live most of the time. Self employed taxes You can have only one principal residence at any one time. Self employed taxes Qualified principal residence indebtedness. Self employed 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. Self employed 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. Self employed 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. Self employed taxes Additional debt incurred to substantially improve your principal residence is also qualified principal residence indebtedness. Self employed taxes Amount you can exclude. Self employed taxes   You can only exclude debt discharged after 2006 and before 2014. Self employed taxes The most you can exclude is $2 million ($1 million if married filing separately). Self employed 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. Self employed taxes Ordering rule. Self employed 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. Self employed taxes Qualified Home This means your main home or your second home. Self employed taxes A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities. Self employed taxes Main home. Self employed taxes   You can have only one main home at any one time. Self employed taxes This is the home where you ordinarily live most of the time. Self employed taxes Second home and other special situations. Self employed 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. Self employed 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. Self employed 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. Self employed taxes If your AGI is more than $109,000 ($54,500 if married filing separately), you cannot deduct your mortgage insurance premiums. Self employed taxes Form 1098. Self employed taxes   The amount of mortgage insurance premiums you paid during 2013 should be reported in box 4. Self employed taxes See Form 1098, Mortgage Interest Statement in Publication 936. Self employed taxes Mortgage Interest Credit The mortgage interest credit is intended to help lower-income individuals afford home ownership. Self employed taxes If you qualify, you can claim the credit on Form 8396 each year for part of the home mortgage interest you pay. Self employed taxes Who qualifies. Self employed taxes   You may be eligible for the credit if you were issued a qualified Mortgage Credit Certificate (MCC) from your state or local government. Self employed taxes Generally, an MCC is issued only in connection with a new mortgage for the purchase of your main home. Self employed taxes The MCC will show the certificate credit rate you will use to figure your credit. Self employed taxes It also will show the certified indebtedness amount. Self employed taxes Only the interest on that amount qualifies for the credit. Self employed taxes See Figuring the Credit , later. Self employed taxes You must contact the appropriate government agency about getting an MCC before you get a mortgage and buy your home. Self employed taxes Contact your state or local housing finance agency for information about the availability of MCCs in your area. Self employed taxes How to claim the credit. Self employed taxes   To claim the credit, complete Form 8396 and attach it to your Form 1040 or Form 1040NR, U. Self employed taxes S. Self employed taxes Nonresident Alien Income Tax Return. Self employed 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. Self employed taxes Reducing your home mortgage interest deduction. Self employed 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. Self employed taxes You must do this even if part of that amount is to be carried forward to 2014. Self employed taxes Selling your home. Self employed 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. Self employed taxes For additional information, see Recapturing (Paying Back) a Federal Mortgage Subsidy, in Publication 523. Self employed taxes Figuring the Credit Figure your credit on Form 8396. Self employed taxes Mortgage not more than certified indebtedness. Self employed 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. Self employed taxes Mortgage more than certified indebtedness. Self employed 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. Self employed 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. Self employed 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. Self employed taxes Example. Self employed taxes Emily bought a home this year. Self employed taxes Her mortgage loan is $125,000. Self employed taxes The certified indebtedness amount on her MCC is $100,000. Self employed taxes She paid $7,500 interest this year. Self employed taxes Emily figures the interest to enter on Form 8396, line 1, as follows:   $100,000 = 80% (. Self employed taxes 80)       $125,000       $7,500 x . Self employed taxes 80 = $6,000   Emily enters $6,000 on Form 8396, line 1. Self employed taxes In each later year, she will figure her credit using only 80% of the interest she pays for that year. Self employed taxes Limits Two limits may apply to your credit. Self employed taxes A limit based on the credit rate, and A limit based on your tax. Self employed taxes Limit based on credit rate. Self employed taxes   If the certificate credit rate is higher than 20%, the credit you are allowed cannot be more than $2,000. Self employed taxes Limit based on tax. Self employed taxes   After applying the limit based on the credit rate, your credit generally cannot be more than your tax liability. Self employed taxes See the Credit Limit Worksheet in the Form 8396 instructions to calculate the limit based on tax. Self employed 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. Self employed taxes Example. Self employed taxes John and his brother, George, were issued an MCC. Self employed taxes They used it to get a mortgage on their main home. Self employed taxes John has a 60% ownership interest in the home, and George has a 40% ownership interest in the home. Self employed taxes John paid $5,400 mortgage interest this year and George paid $3,600. Self employed taxes The MCC shows a credit rate of 25% and a certified indebtedness amount of $130,000. Self employed taxes The loan amount (mortgage) on their home is $120,000. Self employed taxes The credit is limited to $2,000 because the credit rate is more than 20%. Self employed 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. Self employed taxes His credit is limited to $1,200 ($2,000 × 60%). Self employed 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. Self employed taxes His credit is limited to $800 ($2,000 × 40%). Self employed 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. Self employed taxes Example. Self employed taxes You receive a mortgage credit certificate from State X. Self employed taxes This year, your regular tax liability is $1,100, you owe no alternative minimum tax, and your mortgage interest credit is $1,700. Self employed taxes You claim no other credits. Self employed taxes Your unused mortgage interest credit for this year is $600 ($1,700 − $1,100). Self employed taxes You can carry forward this amount to the next 3 years or until used, whichever comes first. Self employed taxes Credit rate more than 20%. Self employed 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). Self employed taxes Example. Self employed taxes In the earlier example under Dividing the Credit , John and George used the entire $2,000 credit. Self employed 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. Self employed 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. Self employed taxes The amount of credit you can claim on the new loan may change. Self employed taxes Table 2 below summarizes how to figure your credit if you refinance your original mortgage loan. Self employed taxes Table 2. Self employed taxes Effect of Refinancing on Your Credit IF you get a new (reissued) MCC and the amount of your new mortgage is . Self employed taxes . Self employed taxes . Self employed taxes THEN the interest you claim on Form 8396, line 1, is* . Self employed taxes . Self employed taxes . Self employed 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. Self employed 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. Self employed 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. Self employed taxes  See New MCC cannot increase your credit above. Self employed taxes An issuer may reissue an MCC after you refinance your mortgage. Self employed 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. Self employed taxes Year of refinancing. Self employed 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. Self employed 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. Self employed 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. Self employed taxes It must show a separate calculation for the part of the year when the new MCC was in effect. Self employed 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. Self employed taxes New MCC cannot increase your credit. Self employed 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. Self employed taxes   In most cases, the agency that issues your new MCC will make sure that it does not increase your credit. Self employed taxes However, if either your old loan or your new loan has a variable (adjustable) interest rate, you will need to check this yourself. Self employed taxes In that case, you will need to know the amount of the credit you could have claimed using the old MCC. Self employed taxes   There are two methods for figuring the credit you could have claimed. Self employed taxes Under one method, you figure the actual credit that would have been allowed. Self employed taxes This means you use the credit rate on the old MCC and the interest you would have paid on the old loan. Self employed taxes   If your old loan was a variable rate mortgage, you can use another method to determine the credit that you could have claimed. Self employed 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. Self employed 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. Self employed taxes The principal of the hypothetical mortgage is the remaining outstanding balance of the certified mortgage indebtedness shown on the old MCC. Self employed 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. Self employed taxes    As part of your tax records, you should keep your old MCC and the schedule of payments for your old mortgage. Self employed 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. Self employed taxes While you own your home, you may add certain items to your basis. Self employed taxes You may subtract certain other items from your basis. Self employed taxes These items are called adjustments to basis and are explained later under Adjusted Basis . Self employed 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. Self employed taxes You also must keep records of the events that affect basis or adjusted basis. Self employed taxes See Keeping Records , below. Self employed taxes Figuring Your Basis How you figure your basis depends on how you acquire your home. Self employed taxes If you buy or build your home, your cost is your basis. Self employed 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. Self employed taxes If you inherit your home from a decedent, different rules apply depending on the date of the decedent's death. Self employed taxes Each of these topics is discussed later. Self employed taxes Property transferred from a spouse. Self employed 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. Self employed taxes Publication 504, Divorced or Separated Individuals, fully discusses transfers between spouses. Self employed 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. Self employed taxes The cost of your home includes most settlement or closing costs you paid when you bought the home. Self employed taxes If you built your home, your cost includes most closing costs paid when you bought the land or settled on your mortgage. Self employed taxes See Settlement or closing costs , later. Self employed 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. Self employed taxes Purchase. Self employed taxes   The basis of a home you bought is the amount you paid for it. Self employed taxes This usually includes your down payment and any debt you assumed. Self employed taxes The basis of a cooperative apartment is the amount you paid for your shares in the corporation that owns or controls the property. Self employed taxes This amount includes any purchase commissions or other costs of acquiring the shares. Self employed taxes Construction. Self employed 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. Self employed 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. Self employed taxes If you built all or part of your home yourself, your basis is the total amount it cost you to build it. Self employed taxes You cannot include in basis the value of your own labor or any other labor for which you did not pay. Self employed taxes Real estate taxes. Self employed 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. Self employed 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. Self employed 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. Self employed taxes You cannot deduct them as taxes paid. Self employed 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. Self employed taxes Do not include those taxes in your basis. Self employed taxes If you did not reimburse the seller, you must reduce your basis by the amount of those taxes. Self employed taxes Example 1. Self employed taxes You bought your home on September 1. Self employed taxes The property tax year in your area is the calendar year, and the tax is due on August 15. Self employed 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. Self employed taxes You did not reimburse the seller for your share of the real estate taxes from September 1 through December 31. Self employed taxes You must reduce the basis of your home by the $426 [(122 ÷ 365) × $1,275] the seller paid for you. Self employed taxes You can deduct your $426 share of real estate taxes on your return for the year you purchased your home. Self employed taxes Example 2. Self employed taxes You bought your home on May 3, 2013. Self employed taxes The property tax year in your area is the calendar year. Self employed taxes The taxes for the previous year are assessed on January 2 and are due on May 31 and November 30. Self employed taxes Under state law, the taxes become a lien on May 31. Self employed taxes You agreed to pay all taxes due after the date of sale. Self employed taxes The taxes due in 2013 for 2012 were $1,375. Self employed taxes The taxes due in 2014 for 2013 will be $1,425. Self employed 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. Self employed taxes Instead, you add the $1,375 to the cost (basis) of your home. Self employed 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. Self employed taxes You add the remaining $476 ($1,425 − $949) of taxes paid in 2014 to the cost (basis) of your home. Self employed taxes Settlement or closing costs. Self employed taxes   If you bought your home, you probably paid settlement or closing costs in addition to the contract price. Self employed taxes These costs are divided between you and the seller according to the sales contract, local custom, or understanding of the parties. Self employed taxes If you built your home, you probably paid these costs when you bought the land or settled on your mortgage. Self employed taxes   The only settlement or closing costs you can deduct are home mortgage interest and certain real estate taxes. Self employed taxes You deduct them in the year you buy your home if you itemize your deductions. Self employed taxes You can add certain other settlement or closing costs to the basis of your home. Self employed taxes Items added to basis. Self employed taxes   You can include in your basis the settlement fees and closing costs you paid for buying your home. Self employed taxes A fee is for buying the home if you would have had to pay it even if you paid cash for the home. Self employed taxes   The following are some of the settlement fees and closing costs that you can include in the original basis of your home. Self employed taxes Abstract fees (abstract of title fees). Self employed taxes Charges for installing utility services. Self employed taxes Legal fees (including fees for the title search and preparation of the sales contract and deed). Self employed taxes Recording fees. Self employed taxes Surveys. Self employed taxes Transfer or stamp taxes. Self employed taxes Owner's title insurance. Self employed 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. Self employed 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. Self employed taxes Items not added to basis and not deductible. Self employed taxes   Here are some settlement and closing costs that you cannot deduct or add to your basis. Self employed taxes Fire insurance premiums. Self employed taxes Charges for using utilities or other services related to occupancy of the home before closing. Self employed taxes Rent for occupying the home before closing. Self employed 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. Self employed taxes Points paid by seller. Self employed 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. Self employed 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. Self employed taxes See Points , earlier, for the rules on deducting points. Self employed 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. Self employed taxes Fair market value. Self employed 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. Self employed taxes Donor's adjusted basis is more than FMV. Self employed 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. Self employed taxes Disposition basis. Self employed 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. Self employed taxes Your basis for figuring a gain is the same as the donor's adjusted basis. Self employed taxes Your basis for figuring a loss is the FMV when you received the gift. Self employed 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. Self employed taxes However, if using the FMV results in a gain, then you neither have a gain nor a loss. Self employed taxes Example 1. Self employed taxes Andrew received a house as a gift from Ishmael (the donor). Self employed taxes At the time of the gift, the home had an FMV of $80,000. Self employed taxes Ishmael's adjusted basis was $100,000. Self employed taxes After he received the house, no events occurred to increase or decrease the basis. Self employed 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. Self employed taxes Example 2. Self employed taxes Same facts as Example 1 , except this time Andrew sells the house for $70,000. Self employed 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. Self employed taxes Example 3. Self employed taxes Same facts as Example 1 , except this time Andrew sells the house for $90,000. Self employed taxes Initially, he figures the gain using Ishmael's adjusted basis ($100,000), which results in a loss of $10,000. Self employed 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. Self employed taxes So in this situation, Andrew will neither have a gain nor a loss. Self employed taxes Donor's adjusted basis equal to or less than the FMV. Self employed 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. Self employed taxes Part of federal gift tax due to net increase in value. Self employed 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. Self employed 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. Self employed taxes The net increase in the value of the home is its FMV minus the adjusted basis of the donor. Self employed taxes Publication 551 gives more information, including examples, on figuring your basis when you receive property as a gift. Self employed 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. Self employed taxes If an estate tax return was filed, your basis is generally the value of the home listed on the estate tax return. Self employed 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. Self employed taxes Publication 551 and Publication 559, Survivors, Executors, and Administrators, have more information on the basis of inherited property. Self employed 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. Self employed taxes Adjusted Basis While you own your home, various events may take place that can change the original basis of your home. Self employed taxes These events can increase or decrease your original basis. Self employed taxes The result is called adjusted basis. Self employed taxes See Table 3, on this page, for a list of some of the items that can adjust your basis. Self employed taxes Table 3. Self employed taxes Adjusted Basis This table lists examples of some items that generally will increase or decrease your basis in your home. Self employed taxes It is not intended to be all-inclusive. Self employed 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. Self employed taxes   An improvement materially adds to the value of your home, considerably prolongs its useful life, or adapts it to new uses. Self employed taxes You must add the cost of any improvements to the basis of your home. Self employed taxes You cannot deduct these costs. Self employed 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. Self employed taxes Amount added to basis. Self employed taxes   The amount you add to your basis for improvements is your actual cost. Self employed taxes This includes all costs for material and labor, except your own labor, and all expenses related to the improvement. Self employed 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. Self employed 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. Self employed taxes These assessments are discussed earlier under Real Estate Taxes . Self employed taxes Improvements no longer part of home. Self employed 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. Self employed taxes Example. Self employed taxes You put wall-to-wall carpeting in your home 15 years ago. Self employed taxes Later, you replaced that carpeting with new wall-to-wall carpeting. Self employed taxes The cost of the old carpeting you replaced is no longer part of your home's adjusted basis. Self employed taxes Repairs versus improvements. Self employed taxes   A repair keeps your home in an ordinary, efficient operating condition. Self employed taxes It does not add to the value of your home or prolong its life. Self employed taxes Repairs include repainting your home inside or outside, fixing your gutters or floors, fixing leaks or plastering, and replacing broken window panes. Self employed taxes You cannot deduct repair costs and generally cannot add them to the basis of your home. Self employed taxes   However, repairs that are done as part of an extensive remodeling or restoration of your home are considered improvements. Self employed taxes You add them to the basis of your home. Self employed taxes Records to keep. Self employed 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. Self employed taxes Also see Keeping Records , below. Self employed taxes Energy conservation subsidy. Self employed 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. Self employed taxes You must reduce the basis of your home by that value. Self employed 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. Self employed 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. Self employed 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. Self employed taxes You should keep any receipts, canceled checks, and similar evidence for improvements or other additions to the basis. Self employed taxes In addition, you should keep track of any decreases to the basis such as those listed in Table 3, earlier. Self employed taxes How to keep records. Self employed taxes   How you keep records is up to you, but they must be clear and accurate and must be available to the IRS. Self employed taxes How long to keep records. Self employed taxes   You must keep your records for as long as they are important for meeting any provision of the federal tax law. Self employed 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. Self employed taxes (A period of limitations is the period of time after which no legal action can be brought. Self employed taxes ) For assessment of tax you owe, this is generally 3 years from the date you filed the return. Self employed 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. Self employed taxes Returns filed before the due date are treated as filed on the due date. Self employed taxes   You may need to keep records relating to the basis of property (discussed earlier) for longer than the period of limitations. Self employed taxes Keep those records as long as they are important in figuring the basis of the original or replacement property. Self employed 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. Self employed taxes Table 4. Self employed taxes Record of Home Improvements Keep this for your records. Self employed taxes Also, keep receipts or other proof of improvements. Self employed taxes Remove from this record any improvements that are no longer part of your main home. Self employed 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. Self employed 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