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Home Sweet Home: The Taxing Journey Of Buying & Selling A House

There is no place like home — or so they say— but homeownership isn’t always a Hallmark card experience.

Whether you are buying or selling a house, the process can be quite stressful, especially when heading into the realm of potential tax implications.

The Nuts and Bolts of Buying a House:

After purchasing a home, it’s always a good idea to start itemizing, if you weren’t already. As a homeowner, you can now deduct your:

  • Qualified home mortgage interest– For most people, the biggest tax break from owning a home comes from deducting mortgage interest. This itemized deduction allows homeowners to count interest they pay on a loan related to purchasing a home against their taxable income, lowering the amount of taxes they owe.
  • Mortgage points paid on a loan– When you buy a house, you may have to pay “points” to the lender in order to get your mortgage. This charge is usually expressed as a percentage of the loan amount. If the loan is secured by your home and the amount of points you pay is typical for your area, the points are deductible as interest as long as the cash you paid at closing via your down payment equals the points.
  • Property taxes– You can deduct the local property taxes you pay each year, too.  There is a limit so be sure to ask what the cap is this tax year.
  • Home-office expense deduction:  If you’re self-employed and work at home, you might be able to deduct expenses for the business use of your home
  • Home improvements- Save receipts and records for all improvements you make to your home, such as landscaping, storm windows, fences, a new energy-efficient furnace and any additions.
  • Energy saving improvements-  To encourage the use of renewable energy sources, Uncle Sam will reward you with a tax credit if you install certain energy-efficient equipment in your home. Solar hot water heaters, solar electric equipment, wind turbines, and fuel cell property are examples of equipment that’s eligible for this tax credit.

As a new homebuyer, you will want to be on the lookout for Form 1098, “Mortgage Interest Statement” which is used to report mortgage interest, including points. This form can help you claim these deductions on your Form 1040.

The 411 on Selling a House:

Taxes can be exactly that— taxing. Selling a house often involves many steps and tax considerations a homeowner should plan for well ahead of time, so don’t be surprised by the possible taxes you may be responsible for upon a sale!

If you sell your house and make a profit, yes, there is a home sale profit tax. Also known as capital gains, the gain is the difference between a higher selling price and a lower purchase price.  Here’s how it works and how to avoid a big tax bill:

The IRS and many states assess capital gains taxes on the difference between what you pay for an asset — your basis — and what you sell it for.

  • Capital gains taxes can apply to investments, such as stocks or bonds, and tangible assets like cars, boats and real estate.

Capital gains on real estate: The IRS typically allows you to exclude up to:

  • $250,000 of capital gains on real estate if you’re single.
  • $500,000 of capital gains on real estate if you’re married and filing jointly.
    For example, if you bought a home 10 years ago for $200,000 and sold it today for $800,000, you’d make $600,000. If you’re married and filing jointly, $500,000 of that gain might not be subject to the capital gains tax (but $100,000 of the gain could be)
  •  If you meet specific criteria, you are allowed to make $250,000 in profits when filing individually and up to $500,000 when filing jointly or as head of the household.

The specific criteria consist of:

  • The house must be your primary residence
    • You must have been the owner of the house for at least two years
    • Over the last five years, you must have lived in the house for more than two years
    • You haven’t claimed this exemption within the previous two years on another property

Any capital gains taxes you owe on the sale of your home are due at the tax deadline for the year in which the sale closes. So, if you sold the home in 2021, your taxes are due on April 15, 2022. 

To help with a future tax burden when selling your house, remember to keep your receipts! Since certain closing costs and home improvements can increase the basis of your home, it is important to keep your receipts to have proof of the increased basis. Increasing basis can reduce taxable income at the time you sell your home or increase the loss on the sale. Certain items include:

  • Survey fees
  • Recording fees
  • Owner’s title insurance
  • Abstract of title fees
  • Construction of additions
  • Addition of central air conditioning
  • Lawn sprinkler system
  • New roof or siding

When in Doubt, Ask the Experts!

Buying and selling a new home is an exciting, emotional, and, of course, stressful time.  Since there is a lot that goes into this process, you may want to speak to a qualified tax professional, like the experts at Jeanine Hemingway, CPA so you don’t miss out on any of these potential tax benefits or avoid tax surprises. Proactive planning is the key to successfully reducing your potential tax liability.  Our approach goes far beyond a year-end task. Throughout the year, our tax experts look for ways to minimize your tax liability and recommend tax-saving strategies that maximize after-tax income. By employing effective tax planning strategies, our clients are able to take advantage of available tax deductions and tax credits. Would you like more money to save, invest, and spend? Your situation is unique, and you deserve personalized services and tax planning advice.  Let our experts help you minimize your tax liability with proactive tax planning strategies.