May 25, 2017 | Posted in:

Tax Facts When You Buy a Home

A new home purchase comes with many new changes.

In addition to new paint colors, a new commute, and in some cases a new city or state, there are also several tax changes that will impact your individual return the following tax season.

A long-standing part of the American Dream, a total of 63.7% of American families own their primary residence, according to United States Census Bureau statistics. Whether you’re a first-time home buyer, have experience in owning real estate, or are simply in the shopping stage, it’s important to be aware of the tax implications of home ownership.


Tax Fact: There’s a Mortgage Interest Deduction

Your monthly mortgage bill will include both principal and interest payments. An individual or married couple filing jointly is 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 your loan to buy or build your main home 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. Turn to your CPA with any questions about your eligibility for the mortgage interest deduction or about what it can mean for your finances.


Tax Fact: Property Taxes Are Deductible, Too

New home ownership typically means paying real estate taxes, but the good news is that you can generally deduct those taxes, which will reduce their impact on your bottom line. Homeowners’ association fees paid on your personal residence are not deductible, but if you have a home office you may be able to deduct a portion of those HOA fees as an expense related to that office.


Tax 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 qualify to exclude up to $250,000 of that gain from your income ($500,000 for a married couple filing jointly) if you’ve owned and used the home as your main home for at least two of the last five years prior to its date of 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 experience any 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. Talk to your CPA about any issues you’re facing related to taxes on a home sale.

“It is important to keep records of your original purchase price plus the cost of improvements made to your home so that you have an accurate cost basis to determine any gain or loss from the sale,” recommends Associate Partner John Adams, CPA, PFS, CFP®, CGMA.


Tax 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 your standard deduction. Your CPA can offer advice if you’re not sure which choice is best for you.

“It’s also important to keep in mind is that since tax returns are prepared annually, the earlier in the year that you buy the home, the more you will have paid by the end of the year in interest and real estate taxes” adds Associate Partner David L. Evans, CPA. “That may make a difference in getting over the standard deduction hump. For example, if you buy your home in January, you will have twelve months of interest and taxes to deduct. If you buy your home in December, you may only have one month of interest and taxes, and that may not be enough to get over that hump. A little planning can make a big difference.


Upcoming Changes

President Trump has proposed a tax code overhaul that may affect the eligible deductions referenced in this article. Per John, “Be aware that the Trump tax reform proposal would eliminate the deduction for property taxes, as well as the deduction for state and local taxes. The Mortgage interest deduction would remain under the Trump proposal. In addition, the Trump tax proposal would include much higher standard deductions to offset the loss of other itemized deductions.”

Read more about President Trump’s proposed tax plan →


Your Alloy Silverstein CPA Can Help

If you’ve recently bought a home or are about to do so, congratulations! This is an exciting time. Since home ownership is a step that will have a significant impact on your finances, this is a good time to reach out to your Alloy Silverstein CPA. He or she can offer valuable advice to help you address all your concerns.

Another reason to involve your CPA? Associate Partner Mike Engleman, CPA suggests to ask your CPA for a tax projection when discussing your tax planning. “We can also prepare a tax projection, which will estimate your tax savings when you file your return.”

© 2017 Money Matters are provided by the American Institute of Certified Public Accountants.


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