Buying a new home this summer?
Summertime is a popular season for purchasing a new house. Before you listen to any great “tax benefits” from your realtor or mortgage lender, let’s clear a few things up before you come in for your appointment.
Purchasing a home?
When it come to the actual purchase of a new home, there are some deductions. Not everything you pay for at settlement is deducted. First, let’s define deduction. A deduction is something that you pay for that will be subtracted from your taxable income. There is nothing that you “get back in your refund”. A deduction is something that you don’t pay taxes on. For example, if you pay $2,500 in property taxes and your taxable income is $50,000, $2,500 will be subtracted from $50,000. So instead of paying taxes on $50,000, you will pay taxes on $47,500.
Appraisals, inspections, realtor fees, and most other settlement charges are not deductible. Loan origination charges (aka “points”), mortgage interest, property taxes, and mortgage insurance premiums are deductible. Sometimes you have to prepay the mortgage insurance premiums and property taxes. If they are prepaid at settlement, they are not deductible until they are used the next year. If a VA Funding Fee or USDA guarantee fee is paid at settlement, it is deductible. Do keep in mind that if you are married filing joint and your adjusted gross income is above $109,000, you are not eligible to deduct your mortgage insurance premiums.
Selling a home?
If you sell your primary residence, you may not have to pay taxes on the profit. If you have been in the house for 2 out of the last 5 years, and make less than $250,000 profit ($500,000 if you are married filing joint), you do not have to claim the income. However if you incur a loss on the sale, you do not get to deduct anything. Even if you spent thousands of dollars on repairs and improvements, you do not receive a tax benefit for doing so. If the house is or was previously a rental property, there are very different rules and the sale will greatly affect your tax return.
Some things to keep in mind
Buying a house is a great investment, but it doesn’t guarantee a huge refund. Purchasing a new home towards the end of the tax year won’t have much of an effect on your tax return as opposed to paying a mortgage for an entire year. Also, getting a low interest rate is awesome when making a monthly payment, but it may not be as helpful for the mortgage interest deduction.
Remember JRJ is open year round to help our clients. Feel free to come into the office before the tax year ends after you purchase a home. Bring your settlement sheet and pay stubs and we can give you an idea of how your next year’s refund will look.
Written by Stephanie Smith