Tax Tips For First Time Home Buyers
September 24, 2013 By 0 Comments
If you’re a first time home buyer, then you should know that there are
certain tax advantages to home ownership. Uncle Sam gives people an incentive to
own their residence in the form of numerous tax incentives.
However, there are also certain misconceptions about what expenses homeowners can deduct from their taxes. If you’re unclear on the matter, then a brief education about our federal tax system and how it handles real estate is in order.
A disclaimer, of course, because the Internet is forever: always make sure you consult a tax adviser before assuming that any claims about tax deductions are accurate. By the time that you read this article, the tax laws could have changed significantly. Further, there could be unusual exceptions based on your personal circumstances.
Home improvements are not tax deductible
You might assume, because you are adding value to the house and improving the real estate market in the area, that your efforts are tax deductible. This is simply not the case. However, if you get a loan to finance those improvements, then the interest on the loan may be tax deductible.
Your utility expenses are not tax deductible
You might get a tax break if you install more energy efficient atmosphere control units in your home. That’s the only break that you can expect to get that’s related to your utilities.
Moving expenses are not deductible
If you purchased your home because of a business change, then your moving expenses may be deductible. Other than that exception, don’t expect a tax deduction for moving expenses.
Your mortgage interest is deductible
If you’re one of the millions of Americans who cannot afford to pay cash for a house, then you should know that the interest on your mortgage is deductible. It’s probably one of the biggest deductions that you’ll take on your taxes.
PMI is deductible
If you can’t afford the full 20% down payment on your house, you’ll probably be required to purchase Private Mortgage Insurance (PMI). This is, as the name implies, an insurance agreement that guarantees some remuneration to your lender in the event that you default. The bad news is that you’ll be required to pay for the insurance. The good news is that it’s tax deductible.
Points/origination fees are deductible
Points (or origination fees) are lender fees that are based on the value of the loan. A 1% origination fee on a $200,000 mortgage, for example, is $2,000. It’s money that you’ll be required to pay to the lender, and it’s tax deductible. You can choose to deduct the points all at once, or you can deduct them over the life of the loan. It might make sense to choose the second option if you want the tax benefits spread out, in piecemeal fashion, over many years.
Property taxes are deductible
When you purchase a home, you’ll pay local property taxes. As a new homeowner, you may be shocked to learn that those property taxes are deductible from your federal taxes. Note, however: in the first year of home ownership, your property taxes are effectively “split” between you and the seller, based on when you purchased the home during the calendar year. For example, if you purchased your home on July 1, then you only get to deduct 50% of your property taxes for that year. The seller gets to deduct the other 50% on his or her taxes. This is because you both owned the home for 6 months out of the year, giving you each 50% (or half) ownership for the full year.
However, there are also certain misconceptions about what expenses homeowners can deduct from their taxes. If you’re unclear on the matter, then a brief education about our federal tax system and how it handles real estate is in order.
A disclaimer, of course, because the Internet is forever: always make sure you consult a tax adviser before assuming that any claims about tax deductions are accurate. By the time that you read this article, the tax laws could have changed significantly. Further, there could be unusual exceptions based on your personal circumstances.
Items that are not tax deductible
Let’s start with the bad news. There are numerous expenses that first time home buyers think that they might be able to deduct from their taxes, when in fact they are not deductible at all.Home improvements are not tax deductible
You might assume, because you are adding value to the house and improving the real estate market in the area, that your efforts are tax deductible. This is simply not the case. However, if you get a loan to finance those improvements, then the interest on the loan may be tax deductible.
Your utility expenses are not tax deductible
You might get a tax break if you install more energy efficient atmosphere control units in your home. That’s the only break that you can expect to get that’s related to your utilities.
Moving expenses are not deductible
If you purchased your home because of a business change, then your moving expenses may be deductible. Other than that exception, don’t expect a tax deduction for moving expenses.
Items that are tax deductible
Now that the bad news is aside, it’s important to know what you can deduct. As noted previously, our government gives numerous tax breaks to homeowners.Your mortgage interest is deductible
If you’re one of the millions of Americans who cannot afford to pay cash for a house, then you should know that the interest on your mortgage is deductible. It’s probably one of the biggest deductions that you’ll take on your taxes.
PMI is deductible
If you can’t afford the full 20% down payment on your house, you’ll probably be required to purchase Private Mortgage Insurance (PMI). This is, as the name implies, an insurance agreement that guarantees some remuneration to your lender in the event that you default. The bad news is that you’ll be required to pay for the insurance. The good news is that it’s tax deductible.
Points/origination fees are deductible
Points (or origination fees) are lender fees that are based on the value of the loan. A 1% origination fee on a $200,000 mortgage, for example, is $2,000. It’s money that you’ll be required to pay to the lender, and it’s tax deductible. You can choose to deduct the points all at once, or you can deduct them over the life of the loan. It might make sense to choose the second option if you want the tax benefits spread out, in piecemeal fashion, over many years.
Property taxes are deductible
When you purchase a home, you’ll pay local property taxes. As a new homeowner, you may be shocked to learn that those property taxes are deductible from your federal taxes. Note, however: in the first year of home ownership, your property taxes are effectively “split” between you and the seller, based on when you purchased the home during the calendar year. For example, if you purchased your home on July 1, then you only get to deduct 50% of your property taxes for that year. The seller gets to deduct the other 50% on his or her taxes. This is because you both owned the home for 6 months out of the year, giving you each 50% (or half) ownership for the full year.
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