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Filing Taxes After Buying a House

January 24, 2023

As a new homeowner, you probably have a few questions on how purchasing real estate impacts your tax filings. The best advice is to ask your accountant and check the IRS website for the latest news. The IRS publishes the Tax Information for Homeowners that goes over essential points you need to know when preparing your return.

Tax laws can change every year, and unless you’re an accountant, you won’t be able to keep up. But, one of the most recent changes that impacted homeownership and what’s deductible was the Tax Cuts and Jobs Act (TCJA). It was passed in December 2017, took effect in 2018, and continues through 2025.

There are Different Types of Deductions

Let’s go over some tax filing basics. We’ll start with deductions.

Standard Deductions vs. Itemized Deductions

Deciding whether it’s best to take the standard deduction or itemize is a simple math problem. Which one saves you the most on taxes?

  • You get a fixed deduction depending on your filing status with the standard deduction.
  • If you itemize, you list all your eligible expenses and deduct those from your income.

Before TCJA, many taxpayers itemized their deductions because that was the best way to save money. But now, with increased standard deductions, that could change for some taxpayers.

Standard Deductions Increased with TCJA

Check out this chart. As you can see, standard deductions almost doubled. So even though we lost a few itemized deductions with TCJA, it wouldn’t matter for most people.

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If you itemize, you’ll take deductions for mortgage interest, property taxes, and any points you paid (to lower your interest rate) when you took out your home loan.

Your accountant or tax preparer can let you know which way will save you the most money.

Itemized Deductions

Here’s a list of common deductions homeowners can take when they itemize:

  • Mortgage Interest
  • Property Taxes
  • Discount Points
  • Mortgage Insurance Premiums

Other Possible Deductions

  • Home Equity Interest – if you used the loan for home improvements
  • Necessary Home Improvements – for things like energy-efficient renovations or medical home improvements.
  • Home Office Expense – if you have a home business, talk to your accountant about taking this write-off.

Tax Documents You’ll Need

  • Form 1098 From Your Mortgage Lender
  • Property Tax Bill
  • Closing Statement

As the first two come in the mail, put them in a folder and save them for your tax preparer. The closing statement will be in the big stack of paperwork you received when you signed all your mortgage documents at closing.

Mortgage Interest Deduction

This is one of the main deductions most homeowners are aware of.

Be on the lookout for a Form 1098 – Mortgage Interest Statement from your loan servicer. They are usually mailed in the last two weeks of January. They report what you paid the prior year for real estate taxes, interest, and potentially any points related to your loan.

Before 2018 and (TCJA), the maximum deduction for mortgage interest was $1 million. After TCJA. the deductions changed to:

  • $750,000 – married couple (filing jointly) or single filer.
  • $375,000 – married couple (filing separately), $375,000 each person.

State Property Taxes

The maximum property tax deduction is $10,000 under the terms of the TCJA.

  • As a homeowner, you pay both state and local property taxes. If you’re a married couple (filing jointly), the maximum deduction for property taxes is $10,000.
  • If you’re married, filing separately, or single, the maximum deduction is $5,000.

Settlement Statement

You’ll receive a settlement statement when you close on your mortgage loan. Keep it handy because you’ll want to give it to your accountant or tax preparer. The settlement statement lists prepaid interest and any points you paid to lower your interest rate.

Simplifying the Process

Although filing taxes can seem confusing, if you have a good accountant and keep your year-end statements from your loan servicer and property taxes, you’ll have the main items you need.

Also, if you take out a home equity loan that you’ll be using for home improvements, make sure to save all of your receipts and contracts with any vendors and contractors.

Homeownership is Worth It!

Whether you’re itemizing your deductions or not, owning a home is worth it. Not only are you building equity, but you also have a stable location to live and create a better life for you and your family.

We’re here to help you with your mortgage needs. Contact us today.

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