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.
Brian Watson, an experienced agent in Santa Fe, New Mexico, completes 28% more sales than other agents in his area. He thinks that the benefits of homeownership are that you have “pride of ownership and have an investment; you’re not just paying rent and paying someone else’s mortgage,” but also that, “you have tax deductions that become available to you when you own a home.”
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
Whether or not you’ll need some of these documents depends on if you file an itemized return or take the standard deduction.
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: $12,200
- Head of household: $18,350
- Married filing jointly or qualified widow(er): $24,400
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 this year and you think itemizing your deductions would save you more money, these are the documents you’ll need to prepare your return.
Mortgage Documents
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 itemizations for prepaid points, mortgage insurance, or private mortgage insurance, “PMI.”
After 2020, PMI will no longer be tax deductible unless extended by congress, 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 Vice President of Finance at TriCorner Homes, 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 their 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.
Settlement Statement
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 your 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.
If you escrow your property tax payments with your mortgage company, they’ll be shown on the Form 1098. Any property taxes paid at closing will appear on your settlement statement.
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, 2020 taxes paid in January 2021 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.”
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 – 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 that were “sudden, swift, unexpected” 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.
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.
Original blog post from HomeLight
https://www.homelight.com/blog/buyer-what-documents-do-i-need-for-taxes-if-i-bought-a-house/
By: Dena Landon, Contributing Author.