Home Buying Continued

What are some of the tax advantages of owning a home?
Tax breaks enter the home ownership picture from all angles: buying, owning and selling. Remember, tax laws are constantly changing and complex, and you should consult with your professional tax advisor before filing any claims on your tax returns.

Tax savings begin with deductions allowed for:

• Settlement charges for the use of money, such as "points." (A point is a sum equal to one percent of your loan amount. Points are charged to increase a lender's yield and attract money into the housing market. For example, one point on an $86,000 loan is $860; two points total $1,720.)

• Prepaid interest on prorated loan payments made between settlement and your first mortgage payment.

• City, town and/or county real estate taxes on the purchased property.
  
  Home Ownership
  
  Your home provides shelter for both you and your taxes. For example:
  
  * The interest paid on your loan is deductible, as are your property taxes. This interest detection is also a major tax advantage in owning a second home for yourself.
  * You may deduct a portion of your home expenses if you have a qualifying home office.
  * Many health-related additions to your home required by your doctor (such as air conditioning for an asthma sufferer) are deductible, provided the addition does not add to the value of your home.
  * Casualty losses (such as flooding, hurricane damage, etc.) that are not reimbursed by insurance are deductible, subject to income limits.
  
  Home Selling
  
  When you sell your home, tax savings help defray many of the expenses of selling, such as:

• "Fix-up" expenses incurred in repairing you home for sale may be deducted, as long as the repairs have been made within 90 days of the sales contract date, are paid for within 30 days of closing and are not capital improvements (such as a new roof).

• If, when you sell, you have to pay a penalty for prepaying your mortgage, that charge can be deducted. Fortunately, few mortgages have prepayment penalties today.

• Under certain conditions, you may deduct moving expenses, within limits.

• If, within two years of selling, you buy a new home of equal or greater value, you can defer payment of any tax on the sale of your old home.

• When that deferred tax comes due, you can subtract the cost of home improvements from your net sale price ("net sale price" is your sale price minus closing costs and broker's and lawyer's fees). You can also subtract title insurance fees, recording fees, transfer taxes and other acquisition costs. This reduces your gain, and also your taxes.

• If you're 55 or older and have lived in your home for 3 of the past 5 years, you do not have to pay taxes on gains up to $125,000.

• If you pass up the one-time $125,000 gain exclusion and if you do not re-invest in a new home when you sell, you can spread out your profit by permitting the buyer to spread purchase payments over a period of years, thereby reducing your taxes in any one year.
  
  Is it true my paycheck will get bigger when I buy a home?
  Yes, if you're renting now or if your mortgage interest payments are higher than what you pay now. Buying a home adds to your "take home" paycheck because you can increase your withholding allowances in anticipation of mortgage interest payment deductions on your next tax return. By increasing your allowances, you reduce the amount withheld to pay future taxes--which puts your tax refund in your paycheck today, not at the end of the year. Ask your tax preparer to estimate how many allowances you should claim to compensate for reduced taxes caused by the interest deductions.
  
  What price home can I afford to buy?
  The easy answer to this all-important question of price is simply adding how much you can afford to borrow to how much you have available for your down payment investment. The total is your maximum affordable home price. (Remember to keep enough cash or credit left over for move-in expenses and as an emergency reserve.) The harder answer is how much you are qualified to borrow.
  
  For starters, you can put the most frequently-used lender's rule-of-thumb to work: the 28% and 36% formulas. This is the test many lenders use to qualify applicants for conventional mortgage loans (though some lenders and mortgage plans apply stricter codes, such as 25% and 33%, especially if your down payment is less than 20% of the sale price).
  
  The 28% test permits you to spend no more than 28% of your gross monthly income on your total monthly housing costs, including principal, interest, taxes and insurance (P.I.T.I.) and condominium fees, if any. For example: 28% of a $3,600 gross monthly income would qualify a buyer for a $1,008 per month payment.
  
  The 36% limit covers both your P.I.T.I. and long-term debts (more than 10 months) such as alimony, regular household expenses (mortgage insurance and/or condominium or association fees), outstanding loans (car, appliances, school) and/or support for children (resident or living separately). For example: 36% of $3,600 would qualify for a $1,296 payment per month.
  
  In our examples, the affordable loan payments for an income of $3,600 per month are a range between $1,008 per month home payment and $1,296 per month combined home and debt payments. (Strict lenders may use only the 28% standard, even with no debts, or ask you to meet both standards.)
  
  In addition to your loan, the cash you have on hand (plus the cash you can acquire) is an important factor. You will need cash for a down payment (ranging from 0 to 5 to 10 to 20% or more of the sale price), closing costs, moving expenses, possible immediate repairs, remodeling and new appliances or furnishings. Also be sure to budget for utilities and maintenance. This takes some figuring.
  
  An agent can help translate your affordable monthly payment into a total loan amount. Add this loan amount to your desired down payment amount and you get the approximate range of home prices you can afford.
  
  Your next step is to shop carefully for the loan that will keep your mortgage payments in line with your budget. Different mortgage plans can dramatically affect your monthly payment--and thus the price home you can afford. Also other plans, especially FHA and VA mortgages, may offer you much more liberal qualifying standards--again, allowing you more home for your income.

Sacramento home buying continued