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Taxes and Home Buying: What You Need to Know

Taxes and Home Buying: What You Need to Know

Tax deductions and other benefits should never be the sole reason for buying a home. However, the perks of doing so are pretty nice — especially if you know what to do and when to do it.

Here are a few ways you can make the most of your home purchase when it comes to taxes:

Mortgage Interest Deduction

This is the most commonly-known tax benefit associated with buying a home. As of 2019, homebuyers can deduct the interest on up to $750,000 of mortgage debt if they are married and file jointly. Those who file individually can write off up to $375,000.

Before the most recent tax reform bill, the caps were $1 million for joint filers and $500,000 for individuals. You may still qualify for these brackets if you purchased your home before 2017. Check with your accountant to see if you do.

An added bonus? You can also deduct up to $10,000 in state and local property taxes on your federal return.

All About IRAs

First-time homebuyers can withdraw up to $10,000 from a traditional IRA or 401K retirement account to use toward a down payment without penalty. If you’re buying a home with your spouse, they can also withdraw up to $10,000.

Both IRAs are a little trickier. You can withdraw money from them at any time, but it will only be tax-free if the account is at least five years old.

Either way, remember that your retirement accounts are not unlimited piggy banks. They should only be used as a last resort for down payments, and you should build the funds back up as quickly as possible once you buy the house.

Moving and Home Improvements

Federal deductions and IRA withdrawals are available to all U.S. home buyers. Beyond that, some states offer specific programs or incentives to make buying a home there even more attractive from a tax perspective.

Check with your realtor or mortgage broker to find out whether your state offers tax credits for first-time home buyers, moving expenses, or home improvements. And, when it comes time to do taxes, make sure to complete all details related to your new home so that you don’t miss out on any tax-related opportunities.

by Author, March. 20, 2019

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