Considerations for Owners of
Martha's Vineyard Real Estate
Tax Deduction for Mortgage Insurance
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
1) Although Congress has extended
this deduction through 2010, to qualify for the deduction
you must have bought or refinanced your home since Jan.
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
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
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
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
"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
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 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
Personal Use of Martha's Vineyard Vacation Home or Dwelling
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.
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.
[Learn about Martha's Vineyard
MIL Rates by going here.]