What You Need to Know for Taxes if You Bought or Sold a Home Last Year

Fri, Feb 03, 2017 @ 08:02 AM Karina Gafford Renting/Buying a Home, Selling a Home

Are you a first time military homebuyer filing your taxes? Congratulations!

You will spend much more time on your taxes by itemizing rather than taking a standardized deduction, but on the plus side tax time just became far more lucrative for you!

Except in a select number of states, renters don’t have the opportunity to claim tax deductions on their rate; homeowners, meanwhile, have lots of opportunities for deductions.

The mortgage interest deduction is the most well-known and popular benefit of homeownership. You can read more about that in our post on 9 Important Tax Deductions for Homeowners and Landlords, but let’s cover what else you need to know for taxes if you bought or sold a home in 2016.

Mortgage Points

Did your lender outline discount or mortgage points when you agreed to and signed for your loan? Your settlement statement will clarify that for you, but you’ll also find this on your Form 1098. A discount point helps you bring down the interest rate for your mortgage, which can save you on your monthly payment.

These points can also bring down your owed taxes, but as every situation with mortgage points is different, it’s best to check with a tax professional first before making the claim.

Other Closing Costs

All the nitpicky little fees, such as lender fees, credit report fees, appraisals, and inspections are not tax write-offs, but are folded into the overall cost of the home. The only settlement or closing costs you can deduct on your tax return for the year the home was purchased or built are Mortgage Interest and certain Real Estate (property) taxes, but there are some specific steps you'd need to follow. Ideally, you'll find a lender who will waive lender fees to help defray some of the heavy costs associated with closing a loan.

Private Mortgage Insurance (PMI)

Military families using their VA loan benefit don’t have to pay for Private Mortgage Insurance, which saves an average of $100 per month. Families who use FHA loan products or conventional loan products with a lower than 20% down payment do have to pay PMI. Currently, PMI counts as a tax write-off, but this deduction is set to expire.

HELOC Interest

Did you add a Home Equity Line of Credit to your home purchase? Many choose to add a HELOC to help with home improvements. You can deduct interest on up to $100,000 on a HELOC. However, you can only deduct on the amount up to the loan to value ratio of the property.

So, if you bought a house for $300,000, but your house is worth $350,000, and you added a HELOC of $100,000, you have a total of $400,000 invested in the property, so you are $50,000 invested over value. This means that you could only deduct interest on $50,000 of the HELOC.

Home Repairs

The IRS is quite finicky about which repairs are tax deductible and which ones are not. A good rule of thumb, though, is that if you make the repair simply to beautify the home, then it is probably not tax deductible. However, there are other instances that repairs are tax deductible, for instance, if you make the repair to help accommodate a disabled family member, use part of the residence as a rental, or run a legitimate business from your home. 

Energy Efficiency Upgrades

In years past, installing energy efficiency upgrades found homeowners financial reward come tax time. Now, energy efficiency upgrade tax benefits will be slowly decreasing over the coming years. Some items that currently count as part of the Residential Renewable Energy Tax Credit include solar panels and solar water heaters.

Home Sale Tax-Free Profit!

If you sold a home at your last duty station and rolled the profits into your home purchase at your next duty station, then you’ve got more good news coming. You don’t owe taxes on the profits gained from that home sale unless your home sale profit exceeded $250,000 for an individual or $500,000 for a married couple. (Of course, there are some requirements, including identifying the home as your primary residence and having lived in it for 2 of the preceding 5 years)

If your profit exceeds those amounts then a) Go you!, and b) Check out our post on how to defer capital gains taxes using something called a 1031 Exchange. Send this link to your wealthy friends and let them know you accept thanks in the form of steak dinners when they save bucket loads of cash. 

Some final thoughts...

If you’re considering buying a home and are weighing tax deductions into your home budget, you may want to reconsider this budgeting option. Tax deductions and credits aren’t permanent, and we can never count on any of them to stick around past the end of the calendar year.

Taxes are eternal, and tax deductions are political.

So, if you're considering making the leap from renter to homeowner, count on no deductions, and anything you get will be a great bonus that you can apply to paying off that mortgage more quickly!

Note: This post is for informational purposes only and does not constitute legal advice. Check with your tax professional or attorney for further details. 

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