Tax Facts When You Buy a Home

Apr 09, 2017

MoneyLife100Are you planning to buy a home sometime soon? About 64 percent of American families own their primary residence, according to U.S. Census Bureau statistics, and homeownership is a long-standing part of the American Dream. Whether you’re still shopping or have already set up housekeeping, it’s a good idea to understand some of the tax implications of ownership. The Pennsylvania Institute of CPAs (PICPA) provides a rundown of some of the tax facts you need to know. 

Fact: There’s a Mortgage Interest Deduction

Your monthly mortgage bill includes both principal and interest payments. Individuals or married couples filing jointly are generally eligible to deduct all interest payments on home acquisition debt up to $1 million (up to $500,000 for a married couple filing separately). Because of the way mortgages are designed, your initial payments are made up mostly of interest, so the deduction is at its highest in the early years of your loan, which is a nice break for new homeowners. Interest on home equity debt of up to $100,000 ($50,000 for a married couple filing separately) is deductible as well. You can also deduct the cost of points you pay for a mortgage. In many cases, if you use a home loan to buy or build your main residence and the points paid were not more than the points generally charged in your area, you can fully deduct the points in the year you paid them. 

Fact: Property Taxes Are Deductible Too

New homeownership typically means paying real estate taxes. The good news is that you can generally deduct those taxes, which will reduce their impact on your bottom line. Homeowner association (HOA) fees paid on your personal residence are not deductible. If you have a home office, though, you may be able to deduct a portion of those HOA fees as an expense related to that office. 

Fact: You Should Know the Tax Rules on the Sale of a Home

If you sell your home for more than your adjusted basis in the property, you generally will qualify for up to a $250,000 exclusion of that gain from your income ($500,000 for a married couple filing jointly) if you owned and used the home as your main residence for at least two of the past five years prior to the sale. (There are special exemptions that may apply to those in the military who are on “qualified official extended duty.”) If you don’t meet those requirements, you may still qualify for a partial exclusion of gain if you experienced one of a variety of unforeseen circumstances, including death, divorce, job loss or employment changes that render you unable to pay basic living expenses for the household, home damage or condemnation, or a pregnancy with multiple births. 

Fact: You’ll Have to Make Decisions about Itemizing

All taxpayers must determine whether it’s best to take the standard deduction or itemize their deductions on their tax returns, based on which option will give them the best tax break. Before their big purchase, new homeowners may have taken the standard deduction, which is $6,300 for individuals and $12,600 for married couples filing jointly. Once you buy your home, however, it may be time to itemize your deductions because your annual mortgage interest payments could be higher than the standard deduction. 

Fact: Your CPA Can Help

If you’ve recently bought a home or are about to do so, congratulations! This is an exciting time. Since homeownership is a step that will have a significant impact on your finances, this is a good time to reach out to your local CPA. He or she can offer valuable advice to help you address how home ownership will affect your finances and all otherfinancial concerns. To find a CPA in your area or for more financial tips,
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