Can Buying a House Help you Save Money on Taxes?
Buying a Home: Initial Expenses
Purchasing a new home often entails paying taxes associated with the sales transaction. These include property or insurance taxes. Whilst paying these taxes is mandatory, depending on your personal circumstances you can request deductions in the following fiscal year when you file your taxes to the IRS,
As you can imagine, when you initially buy a house, you will notice a fall in your disposable income. Suddenly it will seem as if your money has disappeared like the dodo. Rest assured, its effects (if you play your cards right) are temporary and soon you will be able to enjoy that nice meal out or the weekend with the guys in Vegas again.
Initial expenses when buying a new property include many variables which we should take into accounts such as the downpayment, or state taxes.
Californian residents pay county taxes based on their location. For example, if you are buying a house in Bellflower in Los Angeles, you are subject to LA County taxes which amount to 0.73% per year on the property’s value.
You must bear in mind this is indifferent to how much you provide as a downpayment for the sales operation. The percentage is a fixed rate and is applied to the official property’s value. In addition to that, you should also add in supplementary costs such as moving vans, adding new furniture to your home, plus any personal renovations or paintings.
Can you Save Money During the Home Purchase?
Needless to say, you can save some tax money during the sales operation but you must comply with certain conditions.
Homebuyers in California can apply for a tax break. The Californian Constitution provides a $7,000 reduction in the taxable value of your home so long as it’s used as the primary residence by its owner and other conditions specified below are met:
The Disabled Veterans’ Exemption
Army veterans with an injury, illness or disability they suffered due to their military service are eligible to request a tax exemption. Spouses, married or otherwise, can also use this tax benefit.
The exemption has two levels. The Basic Level is often referred to as the $100,000 exemption and is available to all applicants. There is an inflation factor included in the operation. Eligible citizens usually obtain more than $ 100,000 though, In 2018, it was over $130,000. This does not mean, as a buyer you obtain $ 130K back in your taxes. It simply means that if your property is valued at $ 130,000 or more, and you comply with certain conditions, then you are exempt from property taxes.
The Low-Income Level, or the $150,000 exemption, is similar to the Basic Level but it’s offered to citizens whose total earnings are classified as “low-income.”Like before, this rate is variable with inflation, so the exemption is likely to be over $ 150,000. Like with the previous example, this means, that if your property is $ 150K or more, and you meet certain conditions, then you are free from paying property taxes.
Deduction Types Available
Besides tax reductions and possible exemptions, you can also obtain deductions when you file your taxes the following financial year. Here is a breakdown of those that apply:
Mortgage Interest Deductions
You can deduct 100% of the mortgage interest rates you have paid the previous year. In January, your lender (bank or financial institution will send you an IRS 1098 Form where you will see how much you paid in mortgage interest the previous year. Make sure it includes the amount you paid in interest rates as part of the mortgage closing agreement. You should be able to find this number on the Settlement Sheet.
Real Estate Taxes
The amount you pay on property taxes is deductible as well. If you paid your taxes through an escrow account, you will find this amount on the 1098 Form.
Some borrowers pay points as part of a loan refinancing operation. Points are usually priced as part of a percentage of the total amount of your loan. If your loan is for $275,000 then the amount you will pay in points over, your refinance term will be $2,750.
Analyzing your month-to-month repayments, if every month you pay $5.00 in points, then the following year you will be able to deduct $60.00
Private Mortgage Insurance (PMI)
Private Mortgage Insurance policies are applied on loans where the borrower has provided with a downpayment lower than 20% of the property’s value. Deductions are available under certain conditions. Borrowers who are single and with an adjusted gross income lower than $50,000 per year can apply.
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