What are "Ghost Tax Preparers"? What You Need to Know
Learn about ghost preparers and how to avoid them during tax season.
Thinking about buying a home or recently purchased your first home? Congratulations! It’s a huge investment, and knowing the tax implications attached to this decision can be invaluable.
Of course, it’s always important to know why you are purchasing your home before you buy it. You must evaluate both economic and other non-financial factors before signing that contract. In this blog, we'll discuss some tax considerations of this decision; however, if your purchase is solely contingent on the amount of tax breaks you might receive, you could be making a mistake.
Before the final purchase, these fees are likely to show up on your closing documents as a result of the new ownership title:
Real Estate Transfer Taxes
Depending on negotiations and the jurisdiction of the home, the purchase may leave you vulnerable to a sales tax charge (although this is generally assumed by the seller on the sale of property). Many states do not apply sales tax, but it ultimately depends on the city and state the purchase is located in. It’s always best to check while going through the process.
If you are itemizing deductions in 2018, you are allowed to deduct up to $10,000 ($5,000 married filing separately) of state and local taxes. This includes real estate taxes, personal property taxes and state and local income/sales tax (can only deduct one or the other).
Property taxes occur every year once you own a home – it can’t be avoided. As your property taxes go up (in most cases this is good because it means your property is increasing in value), your state and local tax deductions will also go up.
On the closing documents, this may be listed as a "deed tax", "mortgage registry tax" or "stamp tax". How does this work? The transfer tax is based on a percentage of the purchase price and is generally a state tax on any change of ownership in real estate. In essence, real estate transfer taxes could directly affect the cost of the purchase, and may apply regardless of other taxes that may need to be paid.
The jurisdiction of the sale usually decides who will pay – the buyer or seller. In some instances, these costs may be negotiated between the buyer and seller. You cannot deduct these costs from the federal income tax filing like property taxes, but they can be included in the cost basis for future use in determining the value of the home.
You may be able to deduct mortgage interest on your federal income taxes if you itemize, this is your principal residence, you paid or accrued interest during the year, and you used loan proceeds for the purchase of the home. You can deduct home mortgage interest on the first $750,000 ($375,000 if married filing separately) of indebtedness. However, higher limitations ($1 million - $500,000 if married filing separately) apply if you are deducting mortgage interest from indebtedness incurred before December 16, 2017. When you first acquire a mortgage, you are usually paying interest, so this could be a huge deduction over the years.
When purchasing a home, most buyers pay points, or charges associated with obtaining a mortgage. In lender lingo, this can be maximum loan charges, loan origination fees, discount points or a loan discount. You may be able to deduct the full amount of these points as home mortgage interest in the same year of your purchase if:
The mortgage is secured by your main home
Paying points is common in the area and you didn’t pay more than the norm
You have reported the income when you received it, and deducted expenses in the year you paid them (Cash Method of accounting)
They did not replace other fees (appraisal, title company, property taxes, attorney); the cash paid at or before closing plus seller paid points were at least equal to points charged
The loan was used to buy or build your main home
The points were calculated as a percentage of your mortgage principal by the lender
The settlement statement clearly indicates the points charged as part of the mortgage
If you have a low annual income, you may qualify for mortgage interest credit. This requires a Mortgage Credit Certificate (MCC). More information can be obtained by your area’s state or local government regarding the MCC. The credit from this certificate is a dollar-for-dollar reduction in the amount of tax owed, and is based on the certificate credit rate on your MCC. If you qualify, you can also take the mortgage interest deduction, but when itemized, the home mortgage interest deduction must be reduced by the amount of the credit.
In the event you find it is time to sell your home, you may be entitled to an exclusion of $250,000 ($500,000 for certain married taxpayers) if you own and occupy the property as a principal residence for two of the five years immediately before the sale. Generally, this exclusion can only be claimed once every two years; however, exceptions apply. This provision is a huge relief to anyone that has seen the value of their property increase over the years.
There are varied tax breaks made available from local, state and county municipalities. This could be based on income, veteran status, where you live, and if you are retired or disabled. Additionally, it’s always a good idea to save your closing statement after your purchase. When filing your taxes the first year, you may find additional expenses that you didn’t know were tax-deductible.
Likewise, when improving your home, it’s a good idea to save all your receipts. This will give you a solid picture of how much you have invested, and allows you to substantiate expenses on your home upon the eventual sale (home improvement expenses are added to the basis of your house and may reduce the capital gain, if any, upon sale).
Remember: location, sales tax and real estate transfer fees can affect your taxes in various ways. Doing your research is key whether starting the process, in the middle of it, or you’ve already signed on the dotted line. If it appears overwhelming, don’t stress! There are many tax professionals available to guide you through the process. As long as your documentation is in order, you’ll have everything you need to make the most of tax time.
Armed with this information, we hope you feel a little more confident moving forward. Good luck!
Get the latest posts delivered right to your inbox