6
Internal
Revenue
Service Information for Figuring the Credit ..........................
Basis ....................................................
6
10
Index .................................................... 11
Introduction
This publication provides tax information for
first-time homeowners. Your first home may
be a mobile home, a single-family house, a
townhouse, a condominium, or a cooperative
apartment.
The following topics are explained.
mortgage interest. You do not have to reduce estate taxes on your home as follows. listed, are included in the bill. If your taxing
Page 2
authority (or lender) does not furnish you a Deductible taxes. You figure your share of deduct in each year only the interest that
copy of your real estate tax bill, ask for it. real estate taxes in the following way. qualifies as home mortgage interest for that
year. However, there is an exception. See the
Assessments for local benefits. You can- 1) Divide the number of your shares of discussion on Points, later.
not deduct amounts you pay for local benefits stock by the total number of shares out-
that tend to increase the value of your prop- standing, including any shares held by Late payment charge on mortgage pay-
erty. Local benefits include the construction the corporation. ment. You can deduct as home mortgage
of streets, sidewalks, or water and sewer 2) Multiply the corporation's deductible real interest a late payment charge if it was not for
systems. You must add these amounts to the estate taxes by the number you figured a specific service performed by your mort-
basis of your property. in (1). This is your share of the real es- gage holder.
You can, however, deduct assessments tate taxes.
(or taxes) for local benefits if they are for Mortgage prepayment penalty. If you pay
maintenance, repair, or interest charges re- Generally, your share of the corporation's off your home mortgage early, you may have
lated to those benefits. An example is a real estate tax is the amount the corporation to pay a penalty. You can deduct that penalty
charge to repair an existing sidewalk and any gives you. It must reasonably reflect the cost as home mortgage interest.
interest included in that charge. of real estate taxes for your dwelling unit.
If only a part of the assessment is for Refund of real estate taxes. If the cor- Ground rent. In some states (Maryland for
maintenance, repair, or interest charges, you poration receives a refund of real estate taxes example), you may buy your home subject to
must be able to show the amount of that part it paid in an earlier year, it must reduce the a ground rent. A ground rent is an obligation
to claim the deduction. If you cannot show amount of real estate taxes paid this year you assume to pay a fixed amount per year
what part of the assessment is for mainte- when it allocates the tax expense to you. Your on the property. Under this arrangement, you
nance, repair, or interest charges, you cannot deduction for real estate taxes the corporation are leasing (rather than buying) the land on
deduct any of it. paid this year is reduced by your share of the which your home is located.
An assessment for a local benefit may be refund the corporation received. Redeemable ground rents. If you make
listed as an item in your real estate tax bill. If
annual or periodic rental payments on a
so, use the rules in this section to find how
Home Mortgage Interest redeemable ground rent, you can deduct the
much of it, if any, you can deduct.
payments as mortgage interest. The ground
This section of the publication gives you basic rent is a redeemable ground rent only if all
Transfer taxes (or stamp taxes). You can- information about home mortgage interest, of the following are true.
not deduct transfer taxes and similar taxes including information on interest paid at
and charges on the sale of a personal home. settlement, points, and Form 1098, Mortgage 1) Your lease, including renewal periods, is
If you are the buyer and you pay them, in- Interest Statement. for more than 15 years.
clude them in the cost basis of the property. Most home buyers take out a mortgage
If you are the seller and you pay them, they (loan) to buy their home. They then make 2) You can freely assign the lease.
are expenses of the sale and reduce the monthly house payments to either the mort- 3) You have a present or future right (under
amount realized on the sale. gage holder or someone collecting the pay- state or local law) to end the lease and
ments for the mortgage holder. (See Your buy the lessor's entire interest in the land
Homeowners association assessments. house payment, earlier, under What You Can by paying a specified amount.
You cannot deduct these assessments be- and Cannot Deduct.)
cause the homeowners association imposes Usually, you can deduct the entire part of 4) The lessor's interest in the land is pri-
them rather than a state or local government. your house payment that is for mortgage in- marily a security interest to protect the
terest, if you itemize your deductions on rental payments to which he or she is
Special Rules for Cooperatives Schedule A (Form 1040). However, your de- entitled.
duction may be limited if:
If you own a cooperative apartment, some Payments made to end the lease and to
special rules apply to you, though you gen- 1) Your total mortgage balance is more buy the lessor's entire interest are not
erally receive the same tax treatment as other than $1 million ($500,000 if married filing redeemable ground rents. You cannot deduct
homeowners. As an owner of a cooperative separately), or them.
apartment, you own shares of stock in a cor- Nonredeemable ground rents. Pay-
poration that owns or leases housing facilities. 2) You took out a mortgage for reasons
ments on a nonredeemable ground rent are
You can deduct your share of the corpo- other than to buy, build, or improve your
not mortgage interest. You can deduct them
ration's deductible real estate taxes if the home.
as rent if they are a business expense or if
cooperative housing corporation meets all they are for rental property.
of the following conditions. If either of these situations applies to you, you
will need to get Publication 936. You may also
1) The corporation has only one class of need Publication 936 if you later refinance Cooperative apartment. You can usually
stock outstanding. your mortgage or buy a second home. treat the interest on a loan you took out to buy
stock in a cooperative housing corporation as
2) Each stockholder, solely because of Refund of home mortgage interest. If you home mortgage interest if you own a cooper-
ownership of the stock, can live in a receive a refund of home mortgage interest ative apartment and the cooperative housing
house, apartment, or house trailer that you deducted in an earlier year and that corporation meets the conditions described
owned or leased by the corporation. reduced your tax, you generally must include earlier under Special Rules for Cooperatives.
3) No stockholder can receive any distribu- the refund in income in the year you receive In addition, you can treat as home mortgage
tion out of capital, except on a partial or it. For more information, see Recoveries in interest your share of the corporation's
complete liquidation of the corporation. Publication 525. The amount of the refund deductible mortgage interest. Figure your
will usually be shown on the mortgage inter- share of mortgage interest the same way that
4) The tenant-stockholders pay at least est statement you receive from your mortgage is shown for figuring your share of real estate
80% of the corporation's gross income lender. See Mortgage Interest Statement, taxes. For more information on cooperatives,
for the tax year. For this purpose, gross later. see Special Rule for Tenant-Stockholders in
income means all income received dur- Cooperative Housing Corporations in Publi-
ing the entire tax year, including any re- cation 936.
ceived before the corporation changed Deductible Mortgage Interest Refund of cooperative's mortgage in-
to cooperative ownership. To be deductible, the interest you pay must terest. You must reduce your mortgage in-
be on a loan secured by your main home or terest deduction by your share of any cash
Tenant-stockholders. A tenant-stockholder a second home. The loan can be a first or portion of a patronage dividend that the co-
can be any entity (such as a corporation, second mortgage, a home improvement loan, operative receives. The patronage dividend
trust, estate, partnership, or association) as or a home equity loan. is a partial refund to the cooperative housing
well as an individual. The tenant-stockholder corporation of mortgage interest it paid in a
does not have to live in any of the cooper- Prepaid interest. If you pay interest in ad- prior year.
ative's dwelling units. The units that the vance for a period that goes beyond the end If you receive a Form 1098 from the co-
tenant-stockholder has the right to occupy of the tax year, you must spread this interest operative housing corporation, the form
can be rented to others. over the tax years to which it applies. You can should show only the amount you can deduct.
Page 3
Mortgage Interest Home improvement loan. You can also area (test 3), you can deduct in the year paid
fully deduct in the year paid points paid on a only the points that are generally charged.
Paid at Settlement loan to improve your main home, if state- Any additional points are prepaid interest, and
One item that normally appears on a settle- ments (1) through (5) are true. you must spread them over the life of the
ment or closing statement is home mortgage mortgage.
interest. Figure A. You can use Figure A as a quick
You can deduct the interest that you pay guide to see whether your points are fully Mortgage ending early. If you spread your
at settlement if you itemize your deductions deductible in the year paid. If you do not deduction for points over the life of the mort-
on Schedule A (Form 1040). This amount qualify under the exception to deduct the full gage, you can deduct any remaining balance
should be included in the mortgage interest amount of points in the year paid, see Points in the year the mortgage ends. A mortgage
statement provided by your lender. See the in chapter 8 of Publication 535, Business Ex- may end early due to a prepayment, refi-
discussion under Mortgage Interest State- penses, for the rules on when and how much nancing, foreclosure, or similar event.
ment, later. Also, if you pay interest in ad- you can deduct.
vance, see Prepaid interest, earlier, and Example. Dan refinanced his mortgage
Points, next. Amounts charged for services. Amounts in 1993 and paid $3,000 in points that he had
charged by the lender for specific services to spread out over the life of the mortgage.
Points connected to the loan are not interest. Ex- He had deducted $1,000 of these points
amples of these charges are: through 1997.
The term “points” is used to describe certain Dan prepaid his mortgage in full in 1998.
charges paid, or treated as paid, by a bor- 1) Appraisal fees, He can deduct the remaining $2,000 of points
rower to obtain a home mortgage. Points in 1998.
may also be called loan origination fees, 2) Notary fees,
maximum loan charges, loan discount, or 3) Preparation costs for the mortgage note Form 1098. The mortgage interest statement
discount points. or deed of trust, you receive should show not only the total
A borrower is treated as paying any points
4) Mortgage insurance premiums, and interest paid during the year, but also your
that a home seller pays for the borrower's
deductible points. See Mortgage Interest
mortgage. See Points paid by the seller, later. 5) VA funding fees. Statement, later.
General rule. You cannot deduct the full You cannot deduct these amounts as points
amount of points in the year paid. Because either in the year paid or over the life of the Where To Deduct
they are prepaid interest, you generally must mortgage. For information about the tax Home Mortgage Interest
deduct them over the life (term) of the mort- treatment of these amounts and other settle-
ment fees and closing costs, see Basis, later. Enter on line 10 of your Schedule A (Form
gage. 1040) the home mortgage interest and points
Exception. You can fully deduct points reported to you on Form 1098 (discussed
in the year paid if you meet all the following Points paid by the seller. The term
“points” includes loan placement fees that the next). If you did not receive a Form 1098,
tests. enter your deductible interest on line 11, and
seller pays to the lender to arrange financing
for the buyer. The seller cannot deduct these any deductible points on line 12. See Table
1) Your loan is secured by your main home. 1 for a summary of where to deduct home
(Your main home is the one you live in fees as interest. But they are a selling ex-
pense that reduces the seller's amount real- mortgage interest and real estate taxes.
most of the time.) If you paid home mortgage interest to the
ized.
2) Paying points is an established business The buyer treats the points as if he or she person from whom you bought your home,
practice in the area where the loan was had paid them. If all the tests under the Ex- show that person's name, address, and social
made. ception are met, the buyer deducts the points security number (SSN) or employer identifi-
in the year paid. If any of those tests is not cation number (EIN) on the dotted lines next
3) The points paid were not more than the met, the buyer deducts the points over the life to line 11. The seller must give you this
points generally charged in that area. of the loan. number and you must give the seller your
The buyer also reduces the basis of the SSN. Failure to meet either of these re-
4) You use the cash method of accounting. quirements may result in a $50 penalty for
This means you report income in the home by the amount of the seller-paid points.
See Points paid by seller, later, under Basis. each failure.
year you receive it and deduct expenses
in the year you pay them. Most individ-
uals use this method. Funds provided are less than points. If you Mortgage Interest Statement
meet all the tests in the Exception except that If you paid $600 or more of mortgage interest
5) The points were not paid in place of the funds you provided were less than the
amounts that ordinarily are stated sepa- (including certain points) during the year on
points charged to you (test 9), you can deduct any one mortgage to a mortgage holder in the
rately on the settlement statement, such the points in the year paid up to the amount
as appraisal fees, inspection fees, title course of that holder's trade or business, you
of funds you provided. In addition, you can should receive a Form 1098, Mortgage In-
fees, attorney fees, and property taxes. deduct any points paid by the seller. terest Statement, or similar statement from
6) You use your loan to buy or build your Example 1. When you took out a the mortgage holder. The statement will show
main home. $100,000 mortgage loan to buy your home in the total interest paid on your mortgage dur-
December, you were charged one point ing the year. It will also show the deductible
7) The points were computed as a per- points you paid during the year and any points
centage of the principal amount of the ($1,000). You meet all the tests for deducting
points in the Exception, except the only funds you can deduct that were paid by the person
mortgage. who sold you your home. See Points, earlier.
you provided were a $750 down payment.
8) The amount is clearly shown on the Of the $1,000 you were charged for points, The interest you paid at settlement should
settlement statement (for example, Form you can deduct $750 in the year paid. You be included on the statement. If it is not, add
HUD-1) as points charged for the mort- spread the remaining $250 over the life of the the interest from the settlement sheet that
gage. The points may be shown as paid mortgage. qualifies as home mortgage interest to the
from either your funds or the seller's. total shown on Form 1098 or similar state-
Example 2. The facts are the same as in ment. Put the total on line 10 of Schedule A
9) The funds you provided at or before Example 1, except that the person who sold (Form 1040) and attach a statement to your
closing, plus any points the seller paid, you your home also paid one point ($1,000) return explaining the difference. Write “See
were at least as much as the points to help you get your mortgage. In the year attached” next to line 10.
charged. The funds you provided do not paid, you can deduct $1,750 ($750 of the A mortgage holder can be a financial in-
have to have been applied to the points. amount you were charged plus the $1,000 stitution, a governmental unit, or a cooper-
They can include a down payment, an paid by the seller). You must reduce the basis ative housing corporation. If a statement
escrow deposit, earnest money, and of your home by the $1,000 paid by the seller. comes from a cooperative housing corpo-
other funds you paid at or before closing ration, it will generally show your share of in-
for any purpose. You cannot have bor- Excess points. If you meet all the tests in terest.
rowed these funds from your lender or the Exception except that the points paid You should receive your mortgage interest
mortgage broker. were more than are generally paid in your statement for each year by January 31 of the
Page 4
Figure A. Are My Points Fully Deductible This Year?
Start Here:
No
Is the loan secured by your main home? ©
Yes
Ä
No
Is the payment of points an established business practice in
©
your area?
Yes
Ä
Yes
Were the points paid more than the amount generally charged
©
in your area?
No
Ä
No
Do you use the cash method of accounting? ©
Yes
Ä
Yes
Were the points paid in place of amounts that ordinarily are
©
separately stated on the settlement sheet?
No
Ä
Yes
Did you take out the loan to improve your main home?
No
Ä
No
Did you take out the loan to buy or build your main home? ©
Yes
Ä
No
Were the points computed as a percentage of the principal
©
amount of the mortgage?
Yes
Ä
Were the funds you provided (other than those you borrowed No
from your lender or mortgage broker), plus any points the ©
seller paid, at least as much as the points charged?*
Yes
Ä
No
Is the amount paid clearly shown as points on the settlement
©
statement?
Yes
Ä Ä
You cannot fully deduct the points this
© You can fully deduct the points this year.
year. See the discussion on Points.
* The funds you provided do not have to have been applied to the points. They can include a down payment, an escrow deposit, earnest money, and other funds
you paid at or before closing for any purpose.
Page 5
following year. A copy of this form will also
be sent to the IRS. Table 1. Where to Deduct Interest and Taxes Paid on Your Home
See the text for information on what expenses are eligible.
Example. You bought a new home on
May 3. You paid no points on the purchase. IF you are eligible to deduct: THEN report the amount
During the year, you made mortgage pay- on Schedule A (Form 1040):
ments which included $1,872 deductible in-
terest on your new home. The settlement Real estate taxes line 6
sheet for the purchase of the home included
interest of $232 for 29 days in May. The Home mortgage interest and points line 10
mortgage statement you receive from the reported on Form 1098
lender includes total interest of $2,104
($1,872 + $232). You can deduct the $2,104 Home mortgage interest not reported on line 11
if you itemize your deductions.
Form 1098
Refund of overpaid interest. If you receive Points not reported on Form 1098 line 12
a refund of mortgage interest you overpaid in
a prior year, you generally will receive a Form
1098 showing the refund in box 3. See Re- ture (repay) a portion of the credit. For addi-
fund of home mortgage interest, earlier, under Dividing the Credit
tional information, see Publication 523.
Home Mortgage Interest. If two or more persons (other than a married
couple filing a joint return) hold an interest in
More than one borrower. If you and at least Figuring the Credit the home to which the MCC relates, the credit
one other person (other than your spouse if must be divided based on the interest held
Figure your credit on Form 8396. by each person.
you file a joint return) were liable for and paid
interest on a mortgage that was for your
home, and the other person received a Form Mortgage not more than certified indebt- Example. John and his brother, George,
1098 showing the interest that was paid dur- edness. If your mortgage is equal to (or were issued an MCC. They used it to get a
ing the year, attach a statement to your return smaller than) the certified indebtedness mortgage on their main home. John has a
explaining this. Show how much of the inter- amount shown on your MCC, enter on line 1 60% ownership interest in the home, and
est each of you paid, and give the name and of Form 8396 all the interest you paid on your George has a 40% ownership interest in the
address of the person who received the form. mortgage during the year. home. John paid $5,400 mortgage interest
Deduct your share of the interest on line 11 this year and George paid $3,600.
of Schedule A (Form 1040), and write “See Mortgage more than certified indebt- The MCC shows a credit rate of 25% and
attached” next to the line. edness. If your mortgage is larger than the a certified indebtedness amount of $65,000.
certified indebtedness amount shown on your The loan amount (mortgage) on their home
MCC, you can figure the credit on only part is $60,000. Because the credit rate is more
of the interest you paid. To find the amount than 20%, the credit is limited to $2,000.
Mortgage Interest to enter on line 1, multiply the total interest
you paid during the year on your mortgage
John figures the credit by multiplying the
mortgage interest he paid this year ($5,400)
Credit by the following fraction. by the certificate credit rate (25%) for a total
of $1,350. His credit is limited to $1,200
Certified indebtedness amount on your MCC
A mortgage interest credit is available for ($2,000 × 60%).
first-time home buyers whose income is gen- Original amount of your mortgage
George figures the credit by multiplying
erally below the median income for the area the mortgage interest he paid in this year
where they live. The credit is intended to help This fraction, which you may change to a ($3,600) by the certificate credit rate (25%) for
lower-income individuals afford home owner- percentage, will not change as long as you a total of $900. His credit is limited to $800
ship. The tax credit is allowed each year for can take the credit. ($2,000 × 40%).
part of the home mortgage interest they pay.
To be eligible for the credit, you must get Example. Emily's mortgage loan is
a mortgage credit certificate (MCC) from $50,000. The certified indebtedness amount
your state or local government. Generally, an on her MCC is $40,000. She paid $4,000 in- Carryforward
MCC is issued only in connection with a new terest in this year. Emily figures the interest If your allowable credit is reduced because
mortgage for the purchase of your main to enter on line 1 of Form 8396 as follows: of the limit based on your tax, you can carry
home. $40,000 forward the unused portion of the credit to the
The MCC will show the certificate credit = 80% (.80) next 3 years or until used, whichever comes
$50,000
rate you will use to figure your credit. It will first.
also show the certified indebtedness amount $4,000 3 .80 = $3,200
on which the interest is eligible for the credit. Example. You receive a mortgage credit
Emily enters $3,200 on line 1 of Form 8396. certificate from State X. This year, your tax
You must contact the appropriate In each later year, she will figure her credit liability is $1,100, and your mortgage interest
TIP government agency about getting an using only 80% of the interest she pays for credit is $1,700. You claim no other credits.
MCC before you get a mortgage and that year. Your unused mortgage interest credit for this
buy your home. Contact your state or local
year is $600 ($1,700 − $1,100). You can
housing finance agency for information about
carry forward this amount to the next 3 years.
the availability of MCCs in your area. Limits
Two limits may apply to your credit:
Claiming the credit. To claim the credit, Credit rate more than 20%. If you are sub-
complete Form 8396 and attach it to your 1) A limit based on the credit rate, and ject to the $2,000 limit because your certif-
Form 1040. Include the credit in your total for icate credit rate is more than 20%, you cannot
line 47 of Form 1040, and check box b. 2) A limit based on your tax. carry forward any amount more than $2,000
(or your share of the $2,000 if you must divide
Reducing your home mortgage interest Limit based on credit rate. If the certificate the credit).
deduction. If you itemize your deductions credit rate is higher than 20%, the credit
on Schedule A (Form 1040), reduce your cannot be more than $2,000. Example. In the earlier example under
home mortgage interest deduction by the Dividing the Credit, John and George used
amount of the mortgage interest credit. Limit based on tax. Your credit (after ap- the entire $2,000 credit. The excess $150 for
plying the limit based on the credit rate) can- John ($1,350 − $1,200) and $100 for George
Selling your home. If you purchase a home not be more than your regular tax liability on ($900 − $800) cannot be carried forward to
after 1990 using an MCC, and you sell that line 40 of Form 1040 reduced by any credits future years, despite the tax liabilities for John
home within 9 years, you will have to recap- claimed on lines 41 through 44 of Form 1040. and George.
Page 6
Refinancing Table 2. Effect of Refinancing on Your MCC Credit
If you refinance your original mortgage loan
on which you had been given an MCC, you IF you get a new (reissued) MCC and the THEN the interest you claim on
must get a new MCC to be able to claim the amount of your new mortgage is: Form 8396, line 1, is:
credit on the new loan. And the amount of
credit you can claim on the new loan may Smaller or equal to the certificate All the interest paid during the year on your
change. Table 2 summarizes how to figure indebtedness amount on the new MCC new mortgage*
your MCC credit if you refinance your original
mortgage loan. Larger than the certificate indebtedness on Interest paid during the year on your new
An issuer may reissue an MCC after you the new MCC mortgage multiplied by the following fraction.
refinance your mortgage, but only up to one
year after the date of the refinancing. If you Certificate indebtedness on
did not get a new MCC, you may want to your new MCC
contact the state or local housing finance Original amount of your mortgage
agency that issued your original MCC for in-
formation about whether you can get a reis- * The credit using the new MCC cannot be more than the credit using the old MCC. See New MCC
sued MCC. cannot increase your credit.
Other Flooring
Wall-to-wall carpeting
Other
Page 9
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including tax education and assistance pro- answers, we evaluate the quality of our tele- tional Technical Information Service (NTIS)
grams and a list of TeleTax topics. phone services in several ways. for $25.00 by calling 1–877–233–6767 or for
$18.00 on the Internet at www.irs.ustreas.
Personal computer. With your per- • A second IRS representative sometimes gov/cdorders. The first release is available
sonal computer and modem, you can monitors live telephone calls. That person in mid-December and the final release is
access the IRS on the Internet at only evaluates the IRS assistor and does available in late January.
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Index
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