What you can expect from your new home

When one acquires their first new home, there is a great expectation of a new income tax deduction. This expectation exists for both singles and married couples as they enter the new world of itemized deductions. We no longer have to fill out the short income tax forms, we must now use the federal “Schedule A” form to get the tax advantages that others have promised. What awaits the first time home buyer? What income tax benefits really exist, and how does a first-time homebuyer get the benefits? This is what we are here to discuss and we will not rest until we come to a firm understanding of buying a home for the first time.

Step one: the deal

Before moving to a new residence, the entire anticipated settlement date must arrive. Are there income tax deductions on the settlement sheet? There certainly could be. If points are paid to obtain financing, these points are income tax deductible and include points paid by the seller. There must be enough money paid by the borrower at closing to cover the amount of points paid to get a current income tax deduction. When seller-paid points are taken as a tax deduction, the cost basis of the home must be reduced by the seller-paid points. For example, if a new home is purchased for $400,000 and the seller pays one point or $4,000, the buyer can deduct this amount but will reduce the base cost of the home to $396,000. The deduction of points in the settlement year is exclusive to the purchase of a primary residence. Any other purchase of real estate would require the amortization of points to expenses during the life of the loan.

Property taxes paid on settlement are also deductible. This is the amount on page one of the settlement sheet that reimburses the taxes paid by the seller before leaving the property. Taxes placed in escrow (usually shown on page two of the settlement sheet) are currently not deductible as settlement expenses, but will be deductible when disbursed by escrow. The rest of the items on the settlement sheet are currently not deductible and must be capitalized as the cost of the home.

The time of year when a new residence is settled can have a significant impact on the availability of income tax deductions. For example, suppose a married couple moves into a new house in December. Because this is their first home, they have not been itemizing deductions but have been using the $10,300 standard deduction (2006 standard deduction for married couples filing jointly). They won’t make their first mortgage payment until January of next year. Because of this, deductible settlement costs are likely to be of little or no value to happy homeowners. It would have been better to postpone the settlement until January and a year in which they would have twelve mortgage payments, property taxes and could make maximum use of deductible settlement costs. Plan your transaction accordingly.

going forward

Looking ahead, a first-time homeowner can expect to deduct mortgage interest expenses from their income taxes. This is true as long as your original acquisition debt does not exceed $1 million. Real estate taxes will also be deductible as long as the owner or owners of the home are not in the alternative minimum tax. Assuming that the alternative minimum tax does not apply, the first-time homebuyer can expect to get tax deductions for both mortgage interest and property taxes paid during the year. It is even possible to obtain the tax benefits of home ownership immediately by changing the withholdings.

Let’s assume a single taxpayer will have $20,000 in mortgage interest deductions and $4,000 in real estate taxes. Because this taxpayer’s standard deduction of $5,150 is included in the withholding tables, we know that he can take an additional $18,150 in deductions ($24,000 less the standard deduction of $5,150). Currently, to obtain the tax benefit, the taxpayer must file a new W-4 form (withholding exemption form) at the payroll department where they work. This taxpayer would be eligible to claim 5 additional exemptions ($18,150 divided by $3,300 which is the personal exemption allowance) that would serve to increase take-home pay in the coming weeks.

This process works similarly for married couples, except the standard deduction used to determine additional deductions is $10,300. I must mention this caution. If both husband and wife work, they each have a standard deduction built into their respective withholding tables. In this case, the amount used to figure excess deductions is $20,600. Don’t forget that other deductions that make up itemized deductions include state income taxes withheld or paid, charitable contributions, casualty and theft losses, medical expenses in excess of adjusted gross income limits, and miscellaneous deductions (generally for employee business expenses). not refunded). Remember, if a taxpayer is in the alternative minimum contribution, there will be no benefit for income and property taxes paid and there will be no benefit for miscellaneous itemized deductions. This is supposed to be a simple overview of what a new homeowner can expect in terms of income tax benefits. Unfortunately, nothing is ever really simple.