Dear Edith: My wife and I purchased a home and moved into it in 2007. Now we are assembling our documents to file our incomes taxes for last year. However, it is not clear what is deductible for 2007 taxes on the house listed as closing costs, which amounted to $15,000. Should the realtor or closing attorney provide us with a detailed document listing what is tax-deductible? -- A.

Answer: You can deduct any property taxes you paid at closing, and any mortgage interest. If your mortgage lender charged "points" at the closing, then they count as interest, and you can use them as a deduction. That's true even if they were paid by the seller.

Homeseller Tax Break on Homes

Dear Edith: If you own a piece of land, can you write off $500,000 if you own it for more than five or 10 years, and then sell it at a profit? -- T.J.

Answer: You must be thinking of the special homesellers exclusion from capital gains tax. That applies only to one's own residence, not to a piece of land. Once you've owned the land for more than a year, though, your capital gain will qualify for favorable low long-term tax rates.

Surviving Spouse Selling Home

Dear Edith: My sister passed away in November 2006. They lived in California, and my brother-in-law will have a very big profit when he sells their home. He couldn't get it into shape to sell until 2007, and someone told him that means he can't take the whole $500,000 tax-free gain, only $250,000. Did he have a year to sell and take the $500,000, or was it just if he sold in the year my sister died? -- E.M.

Answer: Your brother-in-law was entitled to file a joint-income tax return for 2006, so he could have used the full homesellers' $500,000 exclusion from capital gains tax only if he sold during that calendar year.

All is not lost, though. In most cases, a surviving spouse has a new cost basis on the family home, depending on exactly how the couple held title and the state they live in. I believe that in California, which is a community property state, your brother-in-law now has a "stepped-up" cost basis for the home, probably for its full value.

That would leave him little or no taxable gain, certainly covered by the single taxpayer's $250,000 exclusion. He should check this out with a tax professional, or with the lawyer who's helping settle the estate.

More on Zero Tax

Dear Edith: About the zero percent capital gains tax for 2008-2010 -- it applies only to taxpayers in the two lowest (10 percent and 15 percent) tax brackets. It's not a huge reduction; the capital gains tax in those brackets has been 5 percent for the last few years, anyhow. Also, when it comes to rental property, the zero rate won't apply to the depreciation recapture, which will apparently continues to be taxed at the lower of 25 percent or the taxpayers' non-capital gain tax rate. -- G.W.

Answer: Thanks for the additional information.

Teacher Next Door

Dear Edith: With the housing market in apparent free fall, I have been of the opinion that anyone who enters it now must be crazy. So why am I about to enter not only into the housing market, but the condo and townhouse market?

I am participating in the Teacher Next Door program from Department of Housing and Urban Development (HUD), in which teachers can buy HUD-foreclosed homes in the area of their school for half of the estimated value. So the townhouse I am buying is estimated to be worth twice what I'm paying for it; that's what comparable ones have been selling for. Closing costs, agent fees and repairs will be about another $15,000. I plan to sell the house in three years -- the minimum amount of time I am required to stay there.

Is the market so bad that I won't even be able to turn a profit this way, or is this such a good deal that I'd be crazy not to do it? -- Via e-mail

Answer: I don't know where you're writing from, but in some places there's no "free-fall." Besides, if you don't buy, you'll still have living expenses with nothing to show for them three years from now. So I'd say jump at the chance. Prices would have to fall drastically before you'd lose money, and it's likely you'll come out ahead. Besides, as I say, you have to live somewhere anyhow.

A program like HUD's Teacher Next Door is also available to some law enforcement officers. Information is available at the web site www.fhainfo.com.

Edith Lank will respond personally to any questions sent to her at 240 Hemingway Drive, Rochester, NY 14620 (please include a stamped return envelope), or readers may e-mail her at ehlank@aol.com.
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