Finance Tax Time

Tax Tips for Home Buyers and Sellers in 2005

Primary residence buyers and sellers understand the fundamental tax benefits of owning a home. Many though aren’t aware beyond the typical deductions of mortgage interest and real estate taxes what and when other home buying or selling expenses can be deducted. The second step in determining the timeline for claiming an expense is separating deductions that can be taken now or costs that must be deferred that are considered part of the basis of owning a home.

-Basis is the starting cost for figuring a gain or loss when you sell your home. This starting cost is also used to determine depreciation if you use part of your home for business. Basis must be fair market value. Certain costs can be added to your basis or subtracted, which are called adjustments. Increases to adjustments are: putting an addition on your home, paving a driveway or installing central air-conditioning. Decreases to adjustments are: Casualty loss not covered by insurance, payments received for an easement granted, or depreciation if home is used for business or rental.

If you sold a home in 2005 the first step in deciding which column a home buying or selling expense goes under is to take a good look at the RESPA or Real Estate Settlement Proceedures Act form you received at closing or escrow. Take your RESPA and other home buying or selling expenses that you feel might apply to an experienced tax accountant, so they can organize and separate deductions from costs and eliminate non-deductible items. Deferred costs that figure into the basis of a home benefit sellers in the tax year they sold. Some of the out of pocket costs incurred by buyers in the purchase of a home might have to be delayed, which can come as a surprise to buyers.

To claim deductions you must itemize on Schedule A form 1040 and under IRS rules if you itemize you can’t claim the standard deduction. To see more tax information for first-time homeowners pick up Internal Revenue Form 530 for 2005. Many deductions or costs have exceptions that you must meet to claim a deduction or cost basis expense. Here are some basic guidelines that buyers and sellers should be familiar with before entering a contract to purchase or sell a home.

Deductions

-Mortgage interest. Your main or a second home must secure mortgages.

-Late payment charges on a mortgage. Only deductible if it wasn’t for a specific service in connection with your loan.

-Mortgage prepayment penalties. Only deductible if it wasn’t for a specific service in connection with your loan.

-Real estate taxes. Property taxes actually paid in the tax year.

-Home improvement, mortgage and refinancing loan origination points. You must meet set guidelines or spread costs over life of the mortgage.

Costs

-Transfer taxes. State, county or local. Charges you paid charged by governments when a home is bought or sold.

-Owner’s title insurance.

-Recording fees. Fees charge by governments to have mortgages, satisfactions, deeds and other legal documents registered into databases.

-Legal and Abstract fees.

-Property surveys.

-Real estate brokerage commissions.

-Local assessments that increase the value of your property. New sidewalks, streets, sewer and water systems are costs.

-Special homeowners association condominium assessments that cover capital improvements such as a new roof, not roof repairs.

-Charges for installing utility services for new construction.

Don’t plan on taking as a cost or deduction.

-Mortgage principal payments.

-Mortgage insurance premiums.

-FHA and VA funding fees.

-Credit report fees.

-Loan application fees.

-Loan assumption fees.

-Notary fees.

-Mortgage note preparation costs.

-Appraisal fees by mortgage lender.

-Home inspections.

-Moving costs. Unless you relocated to a new job, restrictions apply.

-Cleaning costs when moving in or out of a home.

-Condominium homeowner association assessments.

-Condominium homeowner association application, move-in and move-out fees.

-Rent for occupancy before closing.

-Homeowner’s insurance premiums.

-Wages for household help.

-Depreciation.

-Contributions to a tax escrow accounts that were not paid to a taxing authority.

-The cost of cable-TV, electricity, gas, telephone or water.

-Charges for services such as trash collection or periodic service charges for lawn mowing or snow shoveling when in violation of local ordinances.

-Repairs. An expense that keeps your home in ordinary and efficient operating condition such as fixing gutters leaks, broken windows and cracked drywall.

-Gifts to buyers or sellers such as flowers, gift baskets or entertainment.

-Your own labor for an improvement. An improvement is based on the actual costs of material labor except your own.

Cooperatives offer many tax benefits for homeowners, but they do have special tax rules. Consult a qualified tax accountant who specializes in cooperatives.

The IRS requires that you keep records that affect the basis cost and deductions until the limitations for income tax returns expires, typically a set period of time after you sell your home.

Mark Nash’s fourth real estate book, “1001 Tips for Buying and Selling a Home” (2005), and working as a real estate broker in Chicago are the foundation for his consumer-centric real estate perspective which has been featured on ABC-TV,CBS The Early Show, Bloomberg TV, CNN-TV, Chicago Sun Times & Tribune, Fidelity Investor’s Weekly, Dow Jones Market Watch, MSNBC.com, The New York Times, Realty Times, Universal Press Syndicate and USA Today.

Tags: 1001, bubble, buy, buying, Estate, home, house, mark nash, Real, realty, sell, selling, tips, trends

Don’t Go to Jail for Failing to Pay State Sales Tax on Internet Purchases

Question: I sell merchandise on eBay and Amazon for side income. I know users of eBay and PayPal can collect sales tax, but it seems very few sellers do. And there doesn’t appear to be a way to collect sales tax when I sell on Amazon Marketplace. Should I worry about this?

ANSWER: If you live in a state where sales tax is charged on retail purchases, as the seller you are responsible for paying sales tax to your state’s tax department for your online sales. However, you pay sales tax only on transactions with buyers in the state where you reside — you don’t pay tax for items shipped outside your state.

To pay the tax, you’ll need to open an account with your state’s Tax Department. As part of this process, you’ll receive a “resale license.” In some states this is called a “resale number” or “sales tax certificate.” So this will add to your bookeeping chores, but there are benefits. For example, in obtaining a resale license, your state is recognizing you as a legitimate business, and you will *not* have to pay state sales tax on the merchandise and other supplies you purchase to run your online business.

Also, a resale license will enable you to more easily open accounts with wholesalers — if should you ever decide to expand your business and go that route. Nowadays, most wholesalers require you to provide proof of a resale license before you can open an account with them.

Again, you don’t collect state sales tax on books you ship to people with addresses outside your state. This is because Internet sales (as well as fax, telephone, and mail-order sales) aren’t subject to sales tax unless you have a physical presence in that other state — meaning an office or warehouse.

In some states, shipping and handling fees are not subject to sales tax, but in some they are - you will need to investigate the issue for your home state.

Some state governments have been trying to start a new system to collect sales tax on all online sales. Under this scenario, known as the Streamlined Sales Tax Project (SSTP), you would have to pay sales tax on books you shipped to customers outside your state. But it will be years before anything like this is enacted, since it’s being fought vigorously be the mail order industry.

See a real-time list of the most highly sought after used and collectible books.

Read more free articles on selling used books profitably online: http://www.weberbooks.com/selling/selling.htm

Steve Weber is author of “The Home-Based Bookstore: Start Your Own Business Selling Used Books on Amazon, eBay or Your Own Web Site” (ISBN 0977240606). Got a question for Steve? Send to: steve_weber@yahoo.com

Tags: Amazon, books, bookselling, collectibles, eBay, selling, selling books, taxes, used books

IRS Won’t Forgive Taxes Owed by eBay, Amazon ‘Hobby’ Sellers

QUESTION: I’m a part-time “hobby” seller of used books on Amazon and eBay. Do I need to pay income tax on the sales I had last year?

ANSWER: Yes, you are required to pay federal income tax and self-employment tax on your net income from selling used books online, whether you sold them on Amazon, eBay, Half.com, ABE, Alibris, or any other venue.

Since you don’t have an employer reporting your bookselling income and withholding a portion for taxes, you must inform the IRS about it yourself. It makes no difference that you consider your bookselling a “hobby.” If you’re making a profit, the IRS considers it a business, and wants its cut.

I’m assuming you won’t be incorporating your business, so you’ll need to report your bookselling income as a “sole proprietorship” on the long tax form, IRS Form 1040, Schedule C, “Profit or Loss From Business.”

You can report your self-employed income using the personal editions of TurboTax or TaxCut software. These programs can save you lots of time, since they give instructions in plain English instead of the bewildering jargon of IRS instruction manuals.

If you made a profit during 2005 from bookselling, you’ll also owe some state income tax for that, so I’d also recommend you also use the state version of TurboTax or TaxCut to figure your state tax obligation.

To complete your tax return, you’ll need to account for every transaction involving your book business. If you’re not already doing so, keep all your receipts and records, and put your expenses into categories such as “postage,” “shipping supplies,” “books,” and so on. This is the information that will go on your Schedule C.

Next year, don’t wait this long to get your affairs in order. With self-employed income, you’re supposed to estimate your tax obligation during the year, and make quarterly payments on your profits, submitted with Form 1040-ES, by April 15, June 15, September 15, and January 15 of the following calendar year. Since you didn’t do this during 2005, you may owe a penalty for late tax payments. If you were expecting a tax refund this year, it may be smaller than you thought.

For next year, I’d recommend you have a separate checking account to track expenses and income from your bookselling. If your bank enables you to download your transactions into Quicken or another personal-finance program, you can automatically categorize expenses such as “postage,” etc., in Quicken. And next year you can transfer this same data into your tax-prep software. This will greatly lessen your bookeeping chores next year, and also give you a handy tool for examining the performance of your book business.