DISCLAIMER: This article is meant for educational purposes only and is not intended to be construed as financial, tax, or legal advice. HomeLight always encourages you to reach out to an advisor regarding your own situation.
Sitting down to do your taxes in your new (to you) home, perhaps you already knew that you might need some documentation from your home purchase last year. Or perhaps that was something you discovered while you were well into the process. Whatever the case, if you bought a home last year, the good news is that it can have a positive impact on your taxes. If you itemize your return, there are several new deductions you can take. But to get their full benefit, you’ll need the appropriate documents.
We spoke with top-performing real estate agent Brian Watson in Santa Fe, New Mexico. Watson has been assisting clients with their home sale documents for more than 10 years.
“You have tax deductions that become available to you when you own a home,” he says, pointing out that renters who become buyers have earned the right to apply valuable tax breaks. Watson adds that when you take that step, you also gain “pride of ownership and have an investment — you’re not just paying rent and paying someone else’s mortgage.”
If you’re thinking about taking those deductions on your new home purchase, here’s what you need to know and the documents you’ll need for taxes.
Itemized vs. standard deductions
The standard deduction is an automatic subtraction from your income — in other words, after applying the standard deduction, your taxable income will be lower.
The amount you can subtract depends upon your filing status. For many people, itemized deductions won’t be higher than the standard deduction. Therefore, choosing this path saves them time.
Each filing status and its related deduction is as follows:
- Single or married filing separately: $12,950 (up $400 from last year)
- Head of household: $19,400 (up $600 from last year)
- Married filing jointly or qualified widow(er): $25,900 (up $800 from last year)
But once you’re eligible for more itemized deductions, such as mortgage interest or a home office, you might be able to deduct more from your taxes if you itemize your deduction. In addition to home-related expenses, you can deduct medical bills, taxes, charitable contributions, and casualty and theft losses.
If you bought a house and you think itemizing your deductions would save you more money, these are the documents you’ll need to prepare your return.
The first set of documents you’ll need to file your taxes relate to your mortgage. One of the perks to homeownership is the mortgage interest deduction, among other housing-related deductions, so you’ll want to make sure you take full advantage of it.
IRS Form 1098
Be on the lookout for this form in the mail. Your lender will send it to you at the beginning of the year, or possibly make it available on your lending portal.
This form reports how much mortgage interest you paid during the year. It also includes amounts you paid for prepaid points, mortgage insurance, or private mortgage insurance, “PMI.”
It’s important to note that the itemized deduction for mortgage insurance premiums has expired. You can no longer claim the deduction for 2022. So don’t expect to receive that deduction every year if you’ve been itemizing your taxes and become accustomed to it.
Shane Fisher, CPA and construction controller at Triple Crown Corporation in Harrisburg, Pennsylvania, says that the most beneficial deduction for homebuyers right now is the mortgage interest deduction. “There’s no real limitation on it,” he says, “unless you have a loan with a principal mortgage above $750,000,” or $1 million if you bought your home before December 15, 2017.
For loans with higher balances, you will have to prorate the interest paid as if you only had a mortgage for $750,000.
Mortgage credit certificate
If you got a first-time buyer incentive from your state/local government agency to help offset your taxes, you must file an IRS form with your taxes that you can fill out using your credit certificate. This will allow you to receive credit against your tax liability.
To claim the credit, complete IRS Form 8396. All the information for the form can be found on your mortgage credit certificate, which you should have received when you closed on your house.
Each state sets the rules for its mortgage certificate program, but all apply income restrictions, limits on the home’s price, and require that it remain your primary residence to claim the credit. To find out more about your state’s program, start on the National Council of State Housing Agencies website.
At the closing, you had to initial and sign a lot of paperwork. One of the first things you probably signed was the settlement statement.
“At the end of closing, you’ll get a closing package along with your settlement statement that shows all the fees you paid,” Watson says.
This statement looks like a ledger, with boxes and numbers up and down each side of the page. Each box has information about the transaction — the purchase price, the amount you paid to taxes and insurance, and the interest you prepaid at the closing. You’ll need this statement if you’re claiming any first-time homebuyer credits.
Your accountant or tax professional will need this statement to confirm the information on other forms when preparing your taxes.
Property tax statement
Even though you probably looked for low property taxes when home shopping, once it’s time to file your taxes, you may be glad if you’re paying more. State and local property taxes are usually tax-deductible, but limited to a combined total deduction of $10,000 ($5,000 if married filing separately).
Note that while you don’t have to submit this form to the IRS, you should keep it in case you’re ever audited. In some states, the real estate taxes payment period doesn’t align with the fiscal year.
Fischer says that in Pennsylvania, for example, school and township taxes are paid in January. But since “the deduction is based off what you paid in that year,” he says, taxes paid in January can’t be deducted until next year.
IRA withdrawal documents
If you’re trying to save money for a house, you might have withdrawn money from an IRA or 401(K). As long as you took out the loan for an approved home purchase, you won’t have to pay the 10% penalty tax for “early” withdrawals.
Make sure you hang onto the documents you got when you bought the house so that you can prove that you used the funds as part of your down payment.
Home improvement invoices
While you can’t deduct home improvements at the time you have the work done (with some exceptions for energy credits; see below), keeping track of repairs could benefit you when it’s time to sell.
You can add the cost of the improvement to the basis of your house, which will decrease your “gain” when you sell. If you bought a fixer-upper and plan on selling it for a profit in a few years, keep all invoices and receipts. These repairs can be used to offset potential gains taxes when you sell.
When thinking about offsetting potential capital gains, there’s a difference between the deductibility of maintenance and deducting repairs. According to Fisher, “If you put a new roof on, an addition, or upgraded electric capacity, you can deduct those upgrades as part of your cost basis when you go to sell. But if you apply a topcoat every year to maintain your driveway, you can’t add it.” Major repairs can be used to increase your cost basis, but maintenance cannot.
If you bought the home as an investment property, however, you can deduct repairs and improvements each year. “It becomes part of your income,” Watson explains, “and any repairs you make may or may not be deductible against the income you earned on that property.”
Documents to claim energy credits
Home improvements related to energy efficiencies are deductible during the year you make the improvement. Depending on your state, you could receive a tax credit for installing solar panels, replacing old windows, or upgrading HVAC systems.
The government wants to incentivize homeowners to make their homes more energy efficient, which reduces their environmental impact, so these improvements can earn you a tax credit.
Form 8829 to deduct a home office
If you have a home office and are claiming that deduction, you’ll need to file a Form 8829. To successfully claim a home office, you’ll need to have a dedicated space set aside in your home for work. This could include a room or a part of a room, as long as you can clearly measure and define the area.
The form allows you to deduct the portion of your utilities that can be attributed to the area of your workspace, as well as property and real estate taxes. For example, if the home office is 25% of your home’s total square footage, you can take 25% of those bills as a deduction.
However, taking the home office deduction can have implications when you sell the home. It’s best to speak with an accountant if you have concerns about this.
Insurance loss documentation
If you had to make a claim on your home insurance during the year, it could impact your taxes. Insurance losses from a “sudden, unexpected, or unusual event” and not an everyday thing (a disaster, in other words) can be itemized and deducted. Expenses related to the loss, such as any deductible you had to pay, could be used to reduce your tax burden.
Unfortunately, to deduct any insurance losses, there’s still a limitation of 10% of your adjusted gross income for your casualty loss. Fisher says that it’s very difficult for most homeowners to clear this hurdle, as it can depend on your income and the amount of loss and other deductions. It would be best to speak with a professional tax accountant if you incurred any insurance losses last year.
Documents showing a work-related or health-related move
Let’s assume that you sold a home and purchased a new home, but you fail to meet the Section 121 requirements for full exclusion of the capital gain (i.e., the one-sale-in-two-years requirement or ownership and use requirements). Depending on why you moved, it’s possible to still qualify for a partial capital gains tax exemption on proceeds from your home sale.
Two common moves that might qualify include a work-related move and a health-related move.
You might qualify for a partial capital gains tax exemption if you had a work-related move that falls within one of these scenarios:
- Your new job is at least 50 miles farther from your home than your previous job.
- You had no previous work location and started a new job that is at least 50 miles from your home.
- Either of the above is true for your spouse or home’s co-owner, or anyone else for whom the home was their residence.
It’s up to you to provide documentation proving that your move was work-related. “If you claimed a reduced exclusion because you got a new job in a different city and then moved because of it, you’re going to want some evidence of that,” says Nathan Rigney, lead tax analyst at H&R Block. There’s no one particular document required by the IRS to prove that a move was work related. It could be a notice of transfer or an offer letter.
It’s also possible to qualify for a partial capital gains tax exemption if you moved because of health-related events that occurred during your time of ownership and residence in your last home.
The four qualifying medical circumstances include:
- A doctor recommended a change in residence for you because you were experiencing a health problem.
- A doctor recommended a change in residence for your spouse, a co-owner of the home, or anyone else for whom the home was his or her residence.
- You moved to obtain, provide, or facilitate diagnosis, cure, mitigation, or treatment of disease, illness, or injury for yourself or a family member.
- You moved to obtain or provide medical or personal care for a family member suffering from a disease, illness, or injury.
According to the IRS, a family member includes your:
- Parent, grandparent, stepmother, stepfather;
- Child (including an adopted child, eligible foster child, and stepchild), grandchild;
- Brother, sister, stepbrother, stepsister, half brother, half sister;
- Mother-in-law, father-in-law, brother-in-law, sister-in-law, son-in-law, daughter-in-law;
- Uncle, aunt, nephew, or niece.
You’ll want to gather any medical documents related to the four qualifying circumstances. Some of these might be the same documents you use if you itemize your deductions for a taxable year on Schedule A (Form 1040), Itemized Deductions.
These partial capital gains tax exemptions are based on the amount of time you actually used your house as your primary residence.
Collect the tax documents you need after buying a home
Owning a home is an investment with tax implications — from deductions to capital gains. Carefully tracking all your receipts and forms allows you to take full advantage of the benefit that it offers you. It’s also important to know what tax breaks are available to you after buying a home, especially if it’s your first home.
For more suggestions, visit HomeLight’s Finances & Tax Implications landing page, and always be sure to consult with your professional tax advisor on the particulars of your situation.
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