Tax Deduction for Mortgage Insurance (PMI)
In 2007 Congress implemented a tax-deduction of Private Mortgage Insurance. But what is mortgage insurance? The accepted standard amount of a mortgage down payment today is 20% of the property purchase price, but some home buyers cannot come up with that much money. Therefore they are considered to be a greater credit risk my lenders. One of the ways lenders fortify themselves against riskier borrowers is by requiring mortgage insurance. This is a policy that the mortgagor (borrower) pays for but the mortgagee (the lender) is the beneficiary. If the borrower cannot pay the loan and the lender has to foreclose, the PMI reimburses the lender's legal costs and lost income. There are many factors that determine insurance premiums but you get the general idea of how it works.

The 2007 PMI tax-deduction has been extended through 2010:
1) Although Congress has extended this deduction through 2010, to qualify for the deduction you must have bought or refinanced your home since Jan. 1, 2007.
2) Families with adjusted gross incomes of up to $100,000 can deduct 100% of their insurance premiums, much the same as they deduct property taxes. The deduction is then phased out up to an adjusted gross income of $110,000.
3) Mortgage insurance guarantees lenders will be repaid if the borrowers default. It's almost always required if you hold less than 20% of the equity in your home.
4) Your equity is the difference between your home's market value and what you owe on your mortgage (and home equity loan, if you have one).
5) The annual premiums run about 0.5% to 0.75% of the outstanding balance, $500 to $750 a year for every $100,000 you owe.

Here is a worksheet on 9 Steps to cancel PMI can help you decide whether you have enough equity to drop that insurance.

The following article was authored by Alan M. Zexter and Lisa A. Szargowicz and discusses a number of other tax considerations. Their contact information is at the bottom of this page should you need to seek their tax assistance.

During the last few years when mortgage rates were historically low, you may have contemplated buying, selling, or refinancing a home or rental property. You want to think carefully about the tax implications of your investment before you act. Understanding the intricacies of tax law is a task best left to the professionals. However, understanding the basics is a great way to protect your family's financial interests.

Mortgage Interest and Points Provide Tax Savings
The biggest tax savings available to the majority of homeowners come from mortgage interest. Each year, taxpayers who itemize can deduct interest paid on up to $1 million in mortgage debt incurred. In addition, the interest you pay on up to $100,000 of home equity debt is also fully deductible, regardless of how you use the funds. Even late-payment fees assessed by your lender are deductible. Keep in mind that these tax deductions and certain other itemized deductions are phased out for some high-income taxpayers. If you paid $600 or more in mortgage interest during the year, you should receive a Mortgage Interest Statement from your lender. This statement shows the total interest paid on your mortgage during the year and any points you paid on your loan. The term "points" is used to describe certain charges you pay to the lender upon taking out the loan. Each point is equal to 1 percent of the loan's value and is treated as prepaid interest under the tax law. In most cases, points are fully deductible by the buyer in the year they are paid, regardless of whether the buyer or seller paid the points.

Martha's Vineyard Property Taxes Are Fully Deductible Too
While real estate taxes can add substantially to your monthly mortgage payment, the amount you pay to local and state authorities is fully deductible (subject to high-income phase-out rules). Many lenders include in monthly statements an amount placed in escrow for real estate taxes. Your deduction for real estate taxes is equal to the amount the lender actually paid from escrow to the taxing authority. Be aware that this amount may be more or less than what you contributed to escrow during the year.

Take Advantage of Tax Credits
When Possible For example, certain taxpayers age 65 or older may be eligible to claim a refundable credit on their Massachusetts state income taxes for real estate taxes paid during the tax year on the residential property they own or rent in Massachusetts, when used as their principal residence. Known as the Circuit Breaker Credit, the maximum credit amount allowed in 2004 for both renters and homeowners is $820. Certain eligibility requirements - age, resident, income thresholds and property assessment values apply so seek professional advice to determine your qualifications.

Tax Breaks Available When Selling Your Martha's Vineyard Home
"If are thinking about purchasing a home or if you have just bought your home, selling it may be the farthest thought from your mind right now. However, it is nice to know that, when it comes time to sell, there is another great tax break awaiting you. You can exclude up to $500,000 in gains from the sale of your home if you are married and file jointly ($250,000 for single taxpayers and married taxpayers filing separately), provided that you have owned and resided in the home as your principal residence for at least two of the prior five years before the sale.

Tax Implications of Rental Property
There are many benefits to owning rental properties. Whether it is a Martha's Vineyard vacation home or an apartment building, owning real estate is an excellent way for most people to diversify their investments as part of an asset allocation strategy. Historically, real estate has also been an excellent hedge against inflation, as it typically will appreciate over time. While not the only benefit, a discussion of owning rental property must include the tax benefits for most investors. The rent you collect is income, and the interest on your mortgage plus other expenses of owning are deductible against that income. In addition, you can depreciate the property over a period of 27.5 years. Simplified, this means that 1/27.5 of the price you paid for the structure is deductible against your rental income each year.

Security Deposits
Do not include a security deposit in your income when you receive it if you plan to return it to your tenant at the end of the lease. But if you keep part or all of the security deposit during any year because your tenant does not live up to the terms of the lease, include the amount you keep in that year.

Expenses Paid by Tenant
If your tenant pays any of your expenses, the payments are rental income. You must include them in your income for the year. You, in turn, can then deduct the expenses as if you paid them directly. For example, while you are out of town, the refrigerator in your rental property stops working. Your tenant pays for the necessary repairs and deducts the repair bill from the rent payment. You must include in you rental income both the net amount of the rent payment and the amount the tenant paid for the repairs. You then can deduct the repair cost as a rental expense.

Rental Expenses
Rental expenses are costs you incur in the ongoing operation of your Martha's Vineyard rental property. Some examples of rental expenses that may be deducted from your total rental income are depreciation, repairs, and operating expenses. The cost of repairs may be deducted in full in the year paid. If you personally repair something on your rental property, you may not deduct the value of your own labor. Only out-of-pocket repair costs, such as materials, are deductible. Other rental expenses you may deduct include advertising, fire and liability insurance, taxes, interest and points, travel, cleaning and maintenance, utilities, tax preparation fees, and commissions paid for the collection of rent.

Personal Use of Martha's Vineyard Vacation Home or Dwelling Unit
If you have any personal use of a vacation home or other dwelling unit that you rent out, you must divide your expenses between rental use and personal use. If your expenses for rental use are more than your rental income, you may not be able to deduct all of the rental expenses.

Rental of Property Used as Your Martha's Vineyard Home
There are special rules relating to the rental of real property that you also use as your main home or your vacation home. If you rent this property for fewer than 15 days during the tax year, you do not need to include the rent you receive as income, nor can you deduct any associated rental expense.

Conclusion
Homeownership on Martha's Vineyard remains one of the most lucrative shelters left in the tax code and with proper planning, tax breaks can make "home sweet home" seem just a little sweeter. ?

Alan M. Zexter CPA is a partner at Rosenfield Raymon Pielech PC (RRP) where he manages the firm's Martha's Vineyard practice. Lisa Szargowicz is a principal at RRP in the firm's tax practice. Through its offices on Airport Road in Edgartown, New Bedford, and Fall River, RRP has been providing a full spectrum of accounting, assurance, tax, and advisory services to successful individuals, businesses, and nonprofit organizations for more than 30 years. For more information, visit www.rrp-cpa.com or call (508) 693-7486.

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