From the Patrick Parker Realty Tax Season Blog Series
5 Ways Buying Your First Home Affects Your Taxes
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, seeIRS 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 referenceIRS 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.
And one more thing…
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.
Keep in mind that this is general information designed to help you put these valuable deductions on your radar. Patrick Parker Realty Agents and Realtors are not certified accountants. Please be sure to check with your tax adviser to see if you qualify for a particular credit or deduction.
Check back in with the Patrick Parker Realty Blog each Tuesday, Thursday and Saturday for more Tax Season Blog Series’ Posts and sign up for the Patrick Parker Realty eNewsletter to have updates delivered to your inbox monthly.
The Blog Series will cover many topics such as How do I qualify for a home seller break?, How do I qualify for a home buyer break?, Do I have to report the home sale on my return?, What is the gain on the sale of my home?, What Are Home Renovation Tax Credits?, Deducting Mortgage Interest, Taking the First-Time Homebuyer Credit, How to Avoid Taxes on Canceled Mortgage Debt, Tax Incentives as they relate to Life’s biggest transitions, such as Marriage, the Birth of a Baby, Divorce, or the death of a Spouse and much more. New posts in this Blog Series will be published twice weekly.
For more information about paying taxes on the sale or purchase of your home or any other questions you have about this article please speak with your tax professional or visit www.irs.gov.