May 21, 2014 : Tahnya Kristina – Guest Contributor
Buying a Home? What You Need To Know Before You Sign
Ed note: It’s time to buy your first house! It’s super easy to get completely distracted by square footage, and hardwoods and granite and two-car garages and so much more. After all those concerns fall away though, you are left with a sizeable monthly mortgage payment and a new item to discuss with your tax pro. Here’s what you need to know.
Buying a home can be the best investment you ever make. It can also be the biggest debt you ever have and the most money you ever spend on a single purchase. I think it’s safe to say buying a home is a big deal.
Know your deductions or your tax bill could increase
Owning a home may add value to your net worth because real estate can be a very good investment. However, buying a home also adds a level of complexity to your personal income tax return. Getting the advice of a tax professional before buying your home can help you understand all of the financial implications and benefits of buying your first home.
Lynn Ebel, a tax attorney with the Tax Institute at H&R Block, says Congress is constantly changing the rules in the tax code. Several popular homeowner tax breaks expired on December 31, 2013, and homeowners are closely watching to see if any of these tax codes will be extended.
One way homeowners can lower their tax bill is by itemizing their deductions.
“Owning a home makes it more likely that you will be able to itemize your tax deductions and get a higher benefit than using your standard deduction.” says Ebel. Homeowners who itemize their deductions need to complete Schedule A of Form 1040 on their tax return.
Five things to know about your home purchase
1. You can deduct mortgage interest
One major tax break that homeowners who itemize deductions are allowed to claim is their home mortgage interest. Couples can deduct the first $1 million of mortgage interest paid during the year, and couples that file separately can deduct up to $500,000 each.
2. You can deduct real property taxes paid
Another tax break that homeowners who itemize their deductions can claim is the real property taxes paid. According to Ebel, “For the year of purchase, (property taxes) are generally deductible by the buyer for the portion of the real property they owned the home.”
3. You can use retirement savings toward the purchase of your first home
Qualified homeowners can withdraw up to $10,000 from a traditional or Roth IRA without incurring the 10% early withdrawal penalty.
4. Closing costs are not deductible
Various closing costs such as appraisal fees, title insurance, survey costs and legal fees are not deductible in the year they are paid. However, according to Ebel “these costs are added to the basis of the home and will eventually reduce the gain or potentially increase the loss on (the) sale.”
5. Home improvements help at tax time
Ebel advises homeowners to “keep all receipts for home improvements because the expenditures add to your basis in your home which may decrease the taxes owed on the sale of your home.”
So what’s the bottom line for couples who want to buy their first home? Before you make any decisions talk to your tax accountant and find out how your home will affect your tax bill this year.