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Buying a Home Tax Solutions

Buying a Home

Purchasing your first home is both exciting and daunting. There are many tax benefits available, so be sure to take advantage to help offset the cost of that new water heater or A/C unit that needs to be installed.

Using your IRA to purchase your first home

If you are a first-time home buyer or you haven’t owned a home in two years, then you may be able to withdraw up to $10,000 from your IRA, penalty free, to help with your down payment. If you are married, then your spouse can also withdraw $10,000 from their IRA and the funds can be used for a home for yourself, your children, grandchildren or even your parents. The $10,000 is a lifetime limit so be sure to use it wisely. The withdrawal is still taxable at the highest rates and you lose the earning potential from those savings, so it shouldn’t be your first choice, but it can be helpful in the right circumstances. A Roth IRA withdrawal is a better alternative – if the account has been open for at least five years then you can withdraw the same amount without any tax or penalty.

Itemized deductions

The 2017 changes to the tax code increased the standard deduction significantly which helped to lower many individuals tax bills. As a result, less people will find a benefit to itemizing their deductions, but if you own your own home, then you should explore both options to make sure you are paying as little tax as possible. The interest that you pay on your mortgage to either purchase or improve your home can be deductible for up to $1 million of debt. You can also deduct up to $10,000 of local property taxes paid. If your mortgage also includes “points” or mortgage insurance premiums, a portion of that amount may be deductible as well.

Energy credits

You can receive a credit up to $500 for purchasing energy efficient skylights, outside doors and windows, insulation systems and roofs, central air conditioners, heat pumps, furnaces, water heaters and water boilers. While the credit is relatively small, it is definitely worth your time to ensure that any improvements made will qualify for the credit. Be sure to mention it to your accountant and provide receipts for the expenses.

If you invest in more exotic energy alternatives, such as solar powered generators and water heaters, then you may be eligible for a 30% credit on the cost of the equipment.

Selling your home

Whether you are upgrading or moving to a new location you may not need to pay tax when you sell your home. It is important to know the rules so that you can maximize your tax savings on any profits. In order to receive the full benefit, you must have lived in the house for at least two of the last five years before the sale, although some exceptions apply so be sure to discuss with your accountant. If you are single, then up to $250,000 of gain on the sale of your home can be excluded from your tax return. If you are married, then that amount is doubled to $500,000.

Purchasing a home is one of the largest investments that you will make in your lifetime. Be sure to take advantage of all potential tax savings and talk to your tax advisor today!

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