Are you buying a home because the one you're in right now doesn't fit your family's needs? Maybe you're ready to buy your first place. When buying a home, it's natural to focus on the tasks at hand: finding the right home for your needs, home getting financing and moving.
It's exciting, but don't forget about the impact of home buying on your taxes. Usually, it's in a good way. Buying and owning home gives you some immediate and long-term tax advantages, like property tax and mortgage interest deductions.
So, if you're buying, know about some of the tax matters involved in the deal. These tax issues can be complicated, so carefully look at the federal tax laws, or get some help from a seasoned real estate or tax attorney.
First-Time Homebuyer Credit
New legislation signed on Nov. 6, 2009, extends and expands the first-time homebuyer credit allowed by previous laws. The new law:
- Extends deadlines for purchasing and closing on a home
- Authorizes the credit for long-time homeowners buying a replacement principal residence
- Increases eligibility by raising homeowners' income limits for credits
First-time homebuyers who bought homes in 2009, subject to certain criteria, are eligible for a maximum credit of $8,000. Long-time owners who bought homes after November 6, 2009, subject to certain criteria, are eligible for a maximum credit of $6,500. Neither credit has to be repaid. These credits also apply to 2010 purchases for those with sales contracts signed before May 1, 2010, subject to certain criteria.
For long-time homeowners seeking to claim the credit, there are specific rules for how long and when you must have owned the previous home. You should consult with a tax professional or an attorney to determine whether you are entitled to the credit.
Point-of-Sale Tax Matters
At closing - the time you actually buy the house - you'll be able to take some immediate federal tax deductions, that is, deductions for that tax year. So, if you close on December 31, 2009, you'll be able to take the deduction on your 2009 tax return.
The tax deductions you'll be able to take include:
- Property taxes paid on the new home. These taxes are prorated or split between the buyer and seller depending on the closing date. For example, if you close in June 2009 you and the seller each will be responsible for about 50% of the property taxes for that year, that is, you're each liable for six months, or a half-year, of taxes. This amount could vary, depending on when you close and the local tax year calendar or billing cycle
- Mortgage "points," which is a form of interest paid up-front on a loan to the bank or mortgage company. One point equals 1 percent of the amount of your mortgage. Points are your payment for a lower interest rate. There are limits on this deduction, for instance the loan must be secured by your "main" home and its purpose is to buy or improve your home, so be careful to check those IRS restrictions
- Mortgage interest, if your bank or mortgage broker required that you pre-pay some interest on your loan at closing. Typically, it's for the partial interest amount owed for the month when you close. This interest is deductible for the year in which it's paid
- Moving expenses are deductible if related to a new job that required relocation, and the distance between your new place of work and old residence is at least 50 miles farther than the distance between your old residence and old place of work. You must work full-time
Looking at your closing date and tax planning is smart. For example, if the closing on your home is scheduled for late December, you may want to delay closing until after the new year begins, depending on whether your tax situation is expected to change.