What You Need to Know about Filing Taxes as a New Homeowner

Disclaimer: We are not qualified tax professionals and are not giving advice. Always speak with a qualified professional before making any legal or financial decisions.



Embarking on the journey of homeownership is a monumental step, filled with both excitement and new responsibilities. As you navigate this new chapter, understanding the impact on your taxes is crucial.

With the ever-evolving tax laws, such as the recent Tax Cuts and Jobs Act (TCJA), it's essential to stay informed on how these changes affect your deductions and overall tax filing.

This guide aims to simplify these complexities, offering you a clear pathway through your tax obligations as a new homeowner. Always remember, consulting with a tax professional and referring to the latest IRS publications will ensure you're making the most informed decisions for your unique situation.

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Standard vs. Itemized Deductions: Which Should You Take?

Choosing between itemizing and standard deduction is simply math. What is the easiest tax savings plan for me? Several people had itemized their deductions to make them a better choice when it came to tax savings. However, the new standard deduction may affect some taxpayers.

As you prepare your tax return, the first question to answer is whether you should take the standard deduction or itemize your deductions. The standard deduction gives you a fixed amount based on your filing status which reduces your taxable income. However, itemizing opens up homeowner-specific write-offs that could score you bigger savings.

Overview of the 2023 Standard Deduction

Here's a quick look at the standard deduction amounts for 2023:

• $13,850 for single filers
• $27,700 for married joint filers
• $20,800 for heads of households
• An extra $1,500 for married couples over 65 years old

These amounts represent what you can deduct from your income without documenting any expenses.

When Itemizing Deductions Is Worth It

Itemized deductions require a bit more paperwork but could slash your tax bill further. You should itemize when your total deductions are more than the standard deduction for your filing status.

As a homeowner, itemizing opens the door to deductions for:

• Mortgage interest
• Property taxes
• Mortgage points
• Certain home improvements
• A portion of capital gains from selling your home

We'll explore these in more detail throughout this guide. But first, gather up your closing statement, mortgage statements, and property tax records to calculate if itemizing will lead to greater savings in your situation.

Homeowner Tax Deductions to Know About

Itemizing your taxes unlocks several deductions exclusive to the world of homeownership. When tallying up your potential write-offs, be sure to include these common, tax laws and breaks for homeowners:

Mortgage Interest Deduction

One of the biggest perks of homeownership is the ability to deduct mortgage interest. If you took out a home loan to purchase or substantially improve your residence, the interest portion of your monthly payments is tax deductible. You can deduct mortgage interest on loans up to $750,000.

This limit is per individual if you're married filing separately or $1.5 million for married joint filers if you took out your mortgage before December 16, 2017. Your mortgage lender will send you a Form 1098 stating the amount of interest paid over the tax year. This amount can directly lower your taxable income when you file your return.

Deducting Mortgage Points

In addition to mortgage interest, you may also be able to deduct mortgage points paid when taking out your home loan. Mortgage points are prepaid interest you elect to pay upfront to lower your interest rate.

Each 1% of points based on your loan amount typically reduces your rate by 0.25%. While points cost more initially at closing, they can still save money for you substantially over the life of your loan.

The IRS considers points as prepaid mortgage interest. So as a new homeowner, you can likely deduct the full amount of points paid at closing under certain circumstances:

• Your loan is secured by your primary residence
• Points were itemized on your settlement statement
• You use the cash rather than accrual method of accounting
• Points were calculated as a percentage of your loan amount

Consult your CPA to confirm if your home ownership-specific situation meets the IRS requirements for fully deducting points in year one of homeownership.

Real estate taxes

You can also deduct local property taxes. This amount is displayed in a form you received from a lender. You should check your accounts for any payments directly by the municipal government.

When you purchase a house you may pay the sellers taxes that have already been accounted for your home purchase. If yes then that sum will be included in your settlement. Make a deduction for property taxes. It is possible to deduct monthly escrow charges as real estate tax.

Property tax statement

Although you may have sought out a less expensive house when you're shopping online you may be happy to pay the higher taxes. Property taxes can be taxable in some areas but can be withdrawn by combined totals if they exceed 5,000 ($5,000 for married filing separately).

Upon escrow, your mortgage payments will also appear in Form 1098. Any property fees collected during the closing period are shown in the settlement documents. While you can't file an audit for tax purposes, it's a good idea to keep it. In a few states, real estate taxes are paid out separately from the tax year in question.

Other Potential Tax Deductions for Homeowners

In addition to the major deductions covered already, here are some other ways being a homeowner can reduce your taxable income:

Property Tax Deduction

Your yearly property taxes on your home are deductible up to $10,000 when you itemize. This includes any taxes paid to your state or local municipality directly related to homeownership. Your potential property tax deduction combines with any state and local income or sales tax paid, for a total $10k itemized deduction limit.

Home Office Deduction

Have a home-based business? Then you may qualify for valuable home office tax deductions. You can deduct expenses like:

• A portion of utilities, insurance, repairs
• Specific office furnishings and equipment
• Rent (if you don’t own your home)
• Depreciation of the office space itself

There are strict rules regarding exclusive business use of the space to qualify. But tracking these expenses can lead to substantial write-offs lowering your taxable income.

Home Improvements for Medical Purposes

Home improvement expenses related to medical conditions like wheelchair ramps, support railings, and accessible remodels can be included as part of your itemized medical expense deduction. As long as changes are directed by a medical practitioner for health reasons, keep home renovation invoices and receipts for tax documentation.

Home Expenses You Can't Deduct on Your Taxes

While we've covered the major categories providing tax breaks for homeowners thus far, many common house-related costs do not directly lower your tax bill.

Here are some notable and standard deductions for home expenses the IRS considers non-deductible:

• Your down payment made to purchase the home
• Principal paid toward your mortgage balance
• Home or flood insurance premiums
• Utility costs like electricity, water, gas, etc.
• General house cleaning and lawn services
• Depreciation related to normal home aging
• Replacing worn-out appliances or remodeling for cosmetic reasons

You also cannot deduct any costs related to paying rent due to portions of your home being rented out on platforms like Airbnb or used exclusively for hobbies. Only formally designated home office space applies to tax write-offs.

While the expenses above may not lead to direct deductions, some can be factored into your cost basis that lowers capital gains taxes when you eventually sell your home. Read on to learn more!

How Selling Your Home Affects Your Taxes

Did you sell your beloved first home to upsize or downsize in 2022? When you make money from a home sale, you'll owe capital gains taxes on any profits unless you qualify for the primary residence capital gains exclusion. Here’s what to know:

Capital Gains Tax Exclusion

As a homeowner, you can exclude up to $250,000 in capital gains per person if you're single or a married couple and filing separately. Married couples get a combined exclusion of up to $500,000.

To qualify, you must have lived in the home as your principal residence or your primary residence for two out of the past five years before selling. The capital gains exclusion applies each time you sell a primary residence, without limits.

Increasing Your Cost Basis

To calculate taxable capital gains, you take the sale price and subtract your cost basis, which includes:

• Original purchase price
• Any improvements made (roofs, remodels, etc.)
• Closing costs

By keeping detailed home purchase and improvement records, you can reduce the taxable profit earned from the sale and save substantially.

Tax Forms and Documentation You’ll Need

Alright, last but not least tax liability - what tax paperwork should you have on hand to file as a homeowner? Here are the key documents to track down and keep copies of:

• Form 1098 - Mortgage interest statement from your lender
• Property tax records - Statements and payments to deduct
• Settlement statement - Detailed closing costs for your purchase
• Home improvement invoices - Deductible upgrades like medical changes or home office
• 1099-S - Issued if you sold your home detailing sale information

You'll need these forms of mortgage documents and statements to tally up deductions, accurately calculate capital gains, and document credits. Having all the right paperwork handy makes filing your tax return less stressful.

Plus, storing these tax documents securely will also help if you ever face an audit. While the likelihood is very low, you must legally be able to support any deductions or credits claimed. Now that you know what to look for, get organized early on!

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