Whether you are buying or selling a house, the process can be quite stressful, especially when thinking about potential tax implications. Let’s look at the documents you need to save and the tax issues you will need to consider.
Buying a House
The new Closing Disclosure Form is one of the most important documents in the home-buying process. In an effort to better inform homebuyers of the terms of their mortgages, the old HUD-1, “Settlement Statement,” has been replaced with the Closing Disclosure Form. This was effective for real estate closings after October 3, 2015.
All homebuyers should receive this document and keep it in a safe place. This form basically gives a picture of all the closing transactions and provides a complete list of incoming and outgoing funds. The statement helps determine the basis of your new home, as well as what you can deduct come April 15.
Extra Tax Benefits
After purchasing a home, it may be beneficial to start itemizing if you weren’t already. As a homeowner, you can now deduct your:
- Qualified home mortgage interest
- Points paid on a loan
- Real estate taxes
- Private mortgage insurance
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. Typically, Form 1098 is mailed to you in January.
Even if you don’t itemize, you may benefit from other tax advantages of becoming a homeowner, such as:
- Penalty-free IRA withdrawals if you are a first-time homebuyer under the age of 59 ½ or
- Residential energy credits
Form 5329, “Additional Tax on Qualified Plans and Other Tax-Flavored Accounts,” can be used to claim the IRA penalty exception. Form 5695, “Residential Energy Credits” can be used to claim any potential residential energy credits.
Selling a House
The new Closing Disclosure Form is equally as important to the seller since certain information reported on the form does affect your basis, which can affect how much gain or loss will be calculated when you report the sale of the property. The document also contains information about certain deductions that the seller may be able to claim.
The seller should also be aware of Form 1099-S, “Proceeds From Real Estate Transactions.” A seller will receive this form if the gain on the sale of the home is not entirely excluded from income.
The gain from your home can be tax-free up to $250,000 if single or $500,000 if married. For more information about this exclusion and requirements to claim the exclusion, IRS Publication 523 “Selling Your Home” is a great place to start your research.
One last thing to keep in mind: always 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 fees and closing costs that can increase your basis include:
- Survey fees
- Recording fees
- Owner’s title insurance
- Abstract of title fees
Examples of certain improvements that increase basis are:
- Construction of a deck or garage
- Addition of central air conditioning
- Lawn sprinkler system
- New roof or siding
Since there is a lot that goes into the buying and selling of a home, you may want to speak to a qualified tax professional so you don’t miss out on any of these potential tax benefits.