Tax return when buying a house
5 Ways Buying Your First Home Affects Your Taxes
Ed Note: Your real estate agent is telling you that it’s a great time to buy. But before you sign on the dotted line and purchase your first home, make sure you consider these tax consequences. David Bakke of Money Crashers is in da house to explain.
If you’re a first-time home buyer. plenty of things are working in your favor. Mortgage rates are still hovering near all-time lows, and despite home prices beginning to rise, they’re still low relative to pre-recession averages. Whether you buy your first home in a bear or a bull market, however, you’re always going to contend with tax implications. As long as you’re aware of relevant regulations and benefits, buying your first home should be the rewarding experience you’ve always dreamed it would be.
1. Home Mortgage Interest Tax Deduction
The most valuable tax deduction for a first-time home buyer is the mortgage interest tax deduction. Your tax return may take more time to complete than in past years since you’re going to have to itemize your deductions in order to take advantage of it, but doing so is in your best interest as it can result in a significant deduction. Be on the lookout for Form 1098 from your lender at year-end, which details how much mortgage interest you’ve paid.
2. Points Are Tax Deductible
When you pay “points” on a mortgage you’re paying extra money to your lender upon execution of the loan in order to lower your interest rate. Each point equals 1% of the purchase price of the home. This amount is tax deductible, however, the rules surrounding how and when you can deduct points paid are complex. In some cases, you cannot deduct the full amount in the year you pay it – you may have to deduct it over the life of your mortgage. For additional information, see IRS Publication 936 .
3. You Can Deduct Property Taxes
As a homeowner, you are required to pay property taxes. These are typically due once per year, although you may be able to pay them in two
installments. Depending on property tax rates in your area, these can be significant expenditures. You can ameliorate the effect of property taxes on your finances by setting up a mortgage escrow account and paying your taxes in monthly increments. This is going to increase your monthly payment, but it protects you from having to write out a big check twice per year.
4. Private Mortgage Insurance is Usually Tax Deductible
If your down payment is less than 20% of the purchase price of your new home, you are often required to pay premiums for private mortgage insurance. which your lender takes out to protect against your potential default. In many cases, this payment is tax-deductible as well. The annual amount may be also included on your 1098 Form from your lender. Just be sure to cancel this insurance as soon as your level of home equity reaches 20%, if possible. Again, you can reference IRS Publication 936 for all details.
5. Advantages of Getting Cash Back from the Seller
When purchasing your first home, you have the ability to request cash back from the seller, known as seller concessions. If you agree in advance, you can pay a higher sale price for the home, if the seller returns that money to you to use toward closing costs or home repairs.
There are limitations as to what you can use these funds for, usually determined by the lender or type of loan you’re applying for. Consult with a mortgage professional to find out which limitations apply to you. Although this plan results in a higher monthly payment, you can reduce your out-of-pocket expenses when purchasing the home, as well as boost your mortgage interest deduction.
As a first-time home buyer, the first few years of your mortgage interest tax deduction are going to be significant. Make sure you use these funds effectively. The last thing you want is to blow your windfall on unneeded purchases. Instead, consider longer-term goals such as creating or building an emergency fund (which can come in handy in the event you need home repairs), setting these funds aside for retirement or your child’s college education.Source: blogs.hrblock.com