Tax Implications of Buying or Selling a House | R&A

Tax Implications of Buying or Selling a House

Whether you’re buying your first home or you’ve decided to sell your home, there are tax effects. Understanding these consequences before you start a transaction can be helpful; it can help you better plan your taxes. There are many tax benefits associated with buying a home, while you could wind up with a tax burden if you’re selling a home.

Tax Benefits of Home Buying

For many new homeowners, tax filings could become more complicated. Those who have not previously itemized deductions may find doing so will reduce their overall tax burden. One of the new forms you’ll receive as a new homeowner is a Form 1098. This is how your new mortgage company will report the interest you are paying on your mortgage. While this is likely to be the largest expense associated with your home, there are also closing costs which may be claimed as a deduction such as:

  • Private mortgage insurance premiums – sometimes these premiums are paid in one lump sum at closing but in some cases, you may be paying the premium over the life of your loan.
  • Real estate taxes – not only can you claim the real estate taxes you paid at closing but you’re able to deduct these taxes for as long as you own your home.
  • Closing costs – some of your closing costs, specifically points you’ve paid for your mortgage, are deductible in the year they are paid. Your tax professional can help ensure you get the full benefit from your deductions.

Keep in mind, new homeowners that borrowed money from an IRA for a first-time home down payment may be able to make these withdrawals without a tax penalty. In addition, if your home meets certain energy requirements, you may qualify for tax credits.

Tax Burden for Home Sales

When you sell your home, you could be facing a higher tax burden. In most cases, couples can avoid paying taxes on the first $500,000 gained from proceeds of a home sale.  However, this means you have to understand the cost-basis used to establish the home’s value. The basis of your purchase price will be increased by certain costs including title insurance and other fees. Other items which increase your cost basis include property enhancements such as a new roof, an addition, or central air conditioning.

Keeping track of the expenses you incur as a homeowner, particularly those expenses which resulted in increasing your home’s value is important. After you’ve made significant home improvements, you likely will be able to sell your home at a higher value and will often increase the cost-basis, reducing your overall tax burden.

Whether you’re buying a home for the first time or you’ve recently sold a home, working with a tax professional can save you thousands of dollars on your taxes. Rather than try to file on your own, work with the tax professionals at Rue & Associates. Contact us to set up an appointment.

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