As you prepare for tax season, you might be wondering if you owe more taxes this year because you bought a house in 2021. The good news is that you probably paid a significant portion of the taxes related to your new home at closing. These include prorated property taxes, sales tax and real estate transfer taxes. Even better, you might qualify for a number of tax credits and deductions related to the purchase and continuing ownership of your home. If you bought a house in 2021, follow below to learn all about tax deductions, tax credits and taxes owed as a first-time homeowner. From property taxes to energy credits, here’s how your tax burden could change after buying a house.
Should You Take the Standard Deduction or Itemized Deductions as a New Homeowner?
Tax filers often wonder if they should take the standard deduction or claim an itemized tax deduction. The standard deduction for homeowners who are single or married filing separately amounted to $12,500 in 2021. That amount increased to $12,950 this year. Those who are married filing jointly could claim $25,100 in 2021 and $25,900 in 2022. Finally, those who file as head of household could claim $18,800 in 2021 and $19,400 in 2022 as their standard deduction.
In her article “8 Tax Deductions For Homeowners: Your Breaks And Benefits” for RocketMortgage, Sarah Sharkey elaborates. She recommends exploring both options with a tax professional before deciding. Sharkey notes that you should “make sure that the total amount of your itemized deductions is larger than the standard deduction.” If your itemized deductions do not exceed the current standard deduction, “it makes more financial sense to take advantage of the standard deduction.” Doing so will “keep your tax liabilities as low as possible.”
All the Documents You’ll Need to File Taxes as a First-Time Homeowner
Documents You Must Produce
First and foremost, homeowners must produce all documents related to their mortgage. Information about the homeowner’s mortgage insurance premium, mortgage interest paid and loan fees paid at closing should all be accounted for within these documents. Some of this information is detailed in IRS Form 1098, which your lender is required to send to you before 1 February 2022.
Closing or Settlement Statement
Next, you will need a copy of your closing or settlement statement. Julia Kagan and Charles Potters explain what a buyer’s closing statement is in their article “Settlement Statement” for Investopedia. According to Kagan and Potters, “a settlement statement is a document that summarizes the terms and conditions of a settlement.” This statement outlines all the terms of the loan. These include “details all of the fees and charges that a borrower must pay extraneously from a loan’s interest.”
Your mortgage broker should have provided you with your closing statement during the home buying process. All mortgage lenders are required to do so by the Real Estate Settlement Procedures Act (RESPA). Kagan and Potters note that there are two types of closing statements issued by mortgage lenders to borrowers. These include “closing disclosures and HUD-1 settlement statements.” The first type of disclosure is a standard settlement statement specifically “formulated and regulated for the mortgage lending market.” The second is issued solely to borrowers with reverse mortgages. In all likelihood, first time homebuyers will receive a standard closing disclosure.
Your settlement statement should detail all charges incurred by you (the buyer) when you applied for the loan and during closing. These include “origination charges, appraisal fees, title administration costs, home inspection costs, background checking fees, underwriting fees, closing fees [and] loan insurance charges.”
Mortgage Credit Certificate
If you bought your first home in 2021 with an income below $151K, you might have qualified for an MCC or Mortgage Credit Certificate. In her article about Mortgage Credit Certificates for Investopedia, Julia Kagan explains. She notes that an MCC is a document provided to a borrower by their originating mortgage lender. This document “directly converts a portion of the mortgage interest paid by the borrower into a non-refundable tax credit.” This credit varies from state to state.
Those buying a home for the first time can claim up to $2,000 with this credit each tax year. As long as the borrower is still paying interest, they can claim this tax credit every year for the life of the loan. Once the borrower no longer pays interest, they cannot take advantage of these tax breaks and their tax bill returns to normal.
Property Tax Statement
Your property tax statement will differ depending on the value of your property and the county you live in. However, most homeowners across the country should have received their property taxes statement sometime in the fall of 2021. According to the County of Santa Clara Department of Tax and Collections, your annual tax bill will include the assessed value of your property. It will also include the amount of property taxes due – both in the first and second installments and in total. Your statement should have a clear “breakdown of the types of taxes being collected.” This breakdown will enumerate the “general tax levy, locally voted special taxes, and city or district special assessments.”
The location of the property and the current owner of record should also appear in your property taxes statement. In some cases, your statement might include real market value for land, real market value for improvements and specially assessed value. Property taxes are typically due before you file federal and state taxes for the year. Be sure to have this document on hand when you prepare to file your taxes in 2022. You might be eligible for a property tax deduction. Check with your state and local government if you did not receive a property tax statement by last November.
Proof of Loss Documents
If your property was damaged during the last calendar year, have your proof of loss documents on hand when you file taxes. In her article “What Documents Will I Need for Taxes if I Bought a House Last Year?” for Homelight.com, Dena Landon explains. Landon notes that insurance loss documentation is necessary to claim a tax break. She writes that “expenses related to the loss, such as any deductible you had to pay, could be used to reduce your tax burden.” However, you can only deduct insurance losses up to “10% of your adjusted gross income.”
According to Landon, “it’s very difficult for most homeowners to clear this hurdle.” This is because it “can depend on your income and the amount of loss and other deductions.” If possible, discuss your losses and your taxable income for the year with a tax professional. Keep in mind that to claim property tax relief, your home must have been damaged in a federally declared or otherwise qualified natural disaster. Fill out IRS Form 4684 to deduct your loss.
Invoices for Home Improvements
Lastly, you will need records of any home improvements made over the last year. The TurboTax resource “Home Improvements and Your Taxes” explains why you should hold onto those receipts. According to TurboTax, “when you make a home improvement…you can’t usually deduct the cost in the year you spend the money.” There is an exception for home improvements made to boost energy efficiency and repairs related to damage incurred during natural disasters. The IRS resource “Energy Incentives for Individuals” explains. It notes that “an individual may claim a credit for (1) 10% of the cost of qualified energy efficiency improvements.”
This credit is called the “residential energy efficient property credit.” Improvements that qualify for this credit include “solar electric properties, solar water heaters and geothermal heat pumps.” Others like “small wind turbines, fuel cell properties and…qualified biomass fuel properties” also qualify. In some cases, so could updating windows, skylights and doors, adding insulation and replacing your HVAC system. Consult your tax professional for a complete list of qualifying properties.
TurboTax notes that if you keep a record, “those expenses may help you reduce your taxes in the year you sell your house.” This all depends on your tax basis. To make a long story short, you might qualify for the energy credit this year. You might qualify other deductions when you sell your home in the future. Hold onto all those receipts to reduce your tax bill when the time comes.
IRS Forms You, Your Mortgage Lender or a Tax Professional Must Fill Out
IRS Form 1040
The main form you must file with the IRS as a homeowner is Form 1040 – the individual income tax return. Whether you are self employed or currently work for a company, you must file this form as a homeowner. Julia Kagan elaborates in her article “Form 1040: U.S. Individual Tax Return” for Investopedia. Kagan writes that “Form 1040 is the standard Internal Revenue Service (IRS) form that individual taxpayers use to file their annual income tax returns.” Form 1040 includes “sections that require taxpayers to disclose their taxable income for the year to determine whether additional taxes are owed.” This form also determines if you will receive a tax return. If you plan to file itemized deductions, you will attach Schedule A to IRS Form 1040.
IRS Form 1098
The next form you need as a first time home buyer – or any homeowner paying mortgage interest– is IRS Form 1098. In her article “A rundown of tax documents you’ll need to file your tax return this season” for Bankrate.com, Kay Bell defines Form 1098. Bell writes that most homeowners can take a mortgage interest deduction. Form 1098 “will tell you how much you paid [in mortgage interest over the] last year.” As mentioned above, your mortgage lender will send this form to you “if you paid at least $600 interest” in 2021. This statement might also include information about “amounts paid toward points to get the loan and escrow disbursements for real estate taxes.” Bell notes that “your mortgage company probably won’t send you an official IRS form.” Instead, they will likely send you “a document of their own design that contains the same data.” We will outline the mortgage interest deduction and other tax benefits of buying a home in further detail below.
IRS Form 8829
Fill out IRS Form 8829 if you conduct business from your home and have a designated office space on your property. According to the IRS, homeowners can “use Form 8829 to figure the allowable expenses for business use of your home.” This form also figures “any carryover to next year of amounts not deductible this year.” Writing for The Balance in her article “How To Complete Form 8829,” Jean Murray explains the tax benefits of filing this form. Murray writes that “IRS Form 8829 is used…to calculate the allowable expenses for business use of their home or apartment.” This form helps business owners “total the amount of allowable deductions for operating expenses and losses” during the last calendar year. In order for your home office to qualify for deductions through Form 8829, it must “be used both regularly and exclusively for business purposes.”
There are some exceptions to these requirements. According to Murray, “you don’t have to meet the exclusive-use test if you use [it] for storage of inventory…or as a day-care facility.” If you are filing your own taxes, you might not want to deal with yet another form. In that case, you can simply “calculate the square footage of your business space…and multiply it by $5 a square foot.” This calculation – which is added directly to your Schedule C – will allow you “to get the deduction amount, up to $1,500.”
IRS Form 8396
To claim your mortgage interest credit, you will need IRS Form 8396. According to H&R Block, you can claim this credit if “you have a qualified mortgage credit certificate (MCC).” In order to qualify, that certificate must have been “issued by your state or local government or agency under a qualified MCC program.”
IRS Form 4684
Finally, you might need to attach IRS Form 4684 to your tax return. You will only need to fill out this form if you plan to report losses incurred during the previous tax year. As outlined above, casualty losses that qualify for a deduction through Form 4784 are those related to unexpected natural disasters. These include – but are not limited to – floods, wildfires, tornados and hurricanes.
How Does Buying a House Affect Taxes?
Taxes Owed by Property Owners
As a homeowner, you might owe capital gains tax, sales tax, real estate transfer tax, property taxes and federal, state and local income tax. Several of these taxes are only owed when you buy a home and will not be owed in future years. Others are recurring. We outline each of these taxes below.
Capital Gains Tax
If you sold your house last year, you might also owe capital gains tax. Tina Orem defines this tax in her article “Selling a House? Avoid Capital Gains Tax on Real Estate in 2022” for NerdWallet. Orem writes that capital gains taxes are assessed “on the difference between what you pay for an asset and what you sell it for.” You will only owe this tax if you sold a house last year and its value was more than $250k. This increases to $500k if you are married and plan to file taxes jointly.
If you sold a house last year that was not your primary residence, you cannot claim the exclusion. Similarly, if you owned the home for less than two years of the five years period, you cannot claim the tax exclusion. Another exception is if you already claimed this exclusion on another property. Lastly, you do not qualify if you chose to do a 1031 exchange when you bought your new house.
When you buy a home, you might be required to pay sales tax – also called “documentary tax.” Property sales tax is a one-time tax payment, unlike property taxes which are paid each year. Tony Guerra explains in his article “A First Time Homebuyer’s Guide to Taxes” for SF Gate. Guerra writes that “whether home buyers or home sellers pay sales taxes on their home sales transactions varies by state.” While some states in the US “require home sellers to pay sales taxes…other states require home buyers to pay any sales taxes.”
Who pays sales tax for a real estate transaction could also differ based on the county you live in. For example, “California is mixed when it comes to home sales taxes and who pays.” According to Guerra, “Southern California home sellers pay documentary transfer taxes.” Alternatively, “buyers in Northern California pay them and either sellers or buyers in Central California pay.” Regardless, property sales taxes are paid at close of escrow – not when you file your taxes.
Real Estate Transfer Taxes or Stamp Taxes
You might also owe real estate transfer taxes – sometimes called stamp taxes – which are due at closing. These are another one-time tax. Evelyn Pimplaskar explains in her article “Buying a house: The tax impact of your new home” for Credit Karma. Pimplaskar writes that “states, counties and municipalities can choose to levy taxes when a piece of real property — like your new home — changes hands.” These taxes are called real estate transfer taxes or “stamp taxes” and might also be incurred when your mortgage is recorded.
According to Pimplaskar, “each state and its taxing body have different rules for how their real estate transfer taxes work.” You might also owe extra real estate transfer taxes to the local government. For example, Pimplaskar notes that the state of “Colorado charges a transfer tax of .01%.” If your Colorado home is located in Telluride, however, “the town will tack on an extra 3% real estate transfer tax.” Real estate transfer taxes might be a flat fee. Alternatively, they might increase with the value of your home — as in the Telluride, Colorado example. Whether you – the buyer – pays these taxes at closing or the seller pays depends on your state and local government as well.
If you bought a house in 2021, you probably paid prorated property taxes into an escrow account at closing. This could mean that you did not owe further property taxes in November 2021. Victoria Lee Blackstone explains in her article “Do Buyers Pay the Property Taxes at Closing?” for SF Gate. According to Blackstone, sellers are responsible for all property tax due until closing, after which the buyer is responsible. Property taxes are usually prepaid for the year. As such, the home buyer typically reimburses “the seller at closing by paying the [prepaid] prorated portion of annual property taxes.”
However, “state and local property tax requirements vary across the United States.” How much you paid the seller in prorated property taxes will appear in your mortgage settlement statement. If property taxes are owed at the end of the year, the seller might not have paid their taxes yet. In this case, the seller might have paid a credit to cover the cost of taxes incurred while they still lived there. Of course, you will pay taxes related to your property next year and every year that follows.
Regardless of homeownership, you must still pay state and federal income tax. This is true if you were employed by a company, were self employed or made money in some other way during 2021. Income taxes are determined when tax filing Form 1040 with the IRS.
Tax Credits and Tax Deductions Available to Property Owners
As a first time homebuyer, you might qualify for a mortgage interest deduction, state and local property tax deduction or mortgage points deduction. You might also qualify for a mortgage interest credit, first time home buyer tax credit and/or residential energy efficient property credit. In some cases, you might even be allowed to waive IRA fees. In our upcoming post “Tax Deductions and Credits for First-Time Homeowners,” we explain each of these in greater detail. Find brief descriptions below.
Mortgage Interest Deduction
In 2022, homeowners can deduct mortgage interest payments up to $750k of mortgage debt. If you bought your house before 2017, you can deduct mortgage interest you paid up to $1M. In order to claim this deduction, you must itemize on your tax return.
State and Local Property Tax Deduction
Also called a SALT deduction, the IRS allows property owners to deduct some property taxes paid to their local and state governments. According to the IRS, “your deduction of state and local income, sales, and property taxes is limited” to a combined total of $10k. This must also be claimed as an itemized deduction.
Mortgage Points Deduction
Next we have the mortgage points deduction. At closing, you might have bought mortgage points to lower the interest rate of your home loan. In our post “How Much Are Closing Costs for Home Buyers,” we noted that each discount point costs 1% of their mortgage. When it comes time to file taxes, you can deduct however much you paid for these points in the year you bought your home. There are a few exceptions, which we will explain in further detail later this week.
You can also deduct private mortgage insurance premiums and mortgage insurance premiums related to your main home. The deduction for home mortgage insurance is just one of many tax breaks for homeowners we will explore during this year’s tax season.
Mortgage Interest Credit
You might also claim the mortgage interest credit on your taxes. In an article for Investopedia, Rajeev Dhir explains. Dhir writes that “individuals who qualify for the mortgage interest credit can claim the credit each year for part of the mortgage interest paid.” We will explain how to deduct the interest paid on your mortgage next week.
First Time Home Buyer Tax Credit
The First Time Homebuyer Tax Credit expired in 2010. It was intended solely to help boost the housing market after the market crash in 2007. Last year, Congress proposed a new bill that would reestablish this credit for first-time buyers. Elizabeth Rivelli explains how the First-Time Homebuyer Act of 2021 could help buyers in “What is the first-time homebuyer tax credit?” for Bankrate.
Rivelli writes that this new “bill would bring back the tax credit from 2008, with many of the same requirements.” The bill would be slightly different. Homebuyers that qualify “could receive a tax credit of up to 10 percent of their home’s purchase price, with a maximum of $15,000.” As of December 2021 – when Rivelli’s article was published – the bill had not yet passed. For now, first-time buyers can reduce their tax bill with the mortgage interest credit or by waiving IRA fees.
Residential Energy Efficient Property Tax Credit
Return to the “Invoices for Home Improvements” section of this post for a review of the residential energy efficient property tax credit.
Waived IRA Fees
If you paid for part of your down payment with money from your retirement account, the IRS might waive the fee they usually charge. Most of the time, you will pay a 10% fee for withdrawing contributions early. However, first-time homebuyers who withdraw funds to pay for their down payment will not be charged that 10%.
Learning More About Tax Breaks and Taxes Owed as a Homeowner
To learn more about tax credits, taxes owed and tax deductions for homeowners, stay tuned for upcoming posts in this series. Over the next few weeks, we will publish the following posts:
“Tax Deductions and Credits for First-Time Homeowners”
“Can You Do a 1031 Exchange for a Primary Residence?”
“Which Home Improvements Qualify for an Energy Tax Credit?”
“Is There a Tax Penalty for Selling a House Before One Year of Ownership?”