When purchasing or owning a home, several types of taxes may apply:
- Annual Taxes: Paid to local governments (county, city, or municipality) based on the property's assessed value.
- Assessment: Property is assessed periodically, and taxes are calculated based on a percentage of the assessed value, which is the value assigned to a property for tax purposes, often based on factors like the property's size, location, and condition.
- Deductibility: Up to $10,000 of property taxes can be deducted on your federal income tax return, subject to the SALT (State and Local Tax) deduction limit, which caps the total amount of state and local taxes that can be deducted on your federal return.
- When Buying: Some states or localities impose a tax on the transfer of property ownership, typically paid at closing.
- Varies by Location: The rate and responsibility for payment (buyer or seller) vary by jurisdiction, so it's essential to be aware of these potential financial adjustments when planning your home purchase.
- Mortgage Interest Deduction: Interest paid on a primary or secondary home mortgage may be deductible on your federal tax return, with limits based on the mortgage amount.
- Points Deduction: Depending on the situation, if you paid points to lower your mortgage interest rate, these may be deductible over the life of the loan or in the year of purchase.
- When Selling: If you sell your home for a profit, the gain may be subject to capital gains tax.
- Exemption: You can exclude up to $250,000 (single) or $500,000 (married filing jointly) of capital gains if you meet confident ownership and use criteria, which generally require that you've owned the home and used it as your primary residence for at least two out of the last five years.
- Deductibility: If you pay PMI on a conventional loan and meet income requirements, the premiums may be tax-deductible.
- Mortgage Interest Deduction: Similar to federal taxes, many states allow deductions for mortgage interest and property taxes, though this varies by state.
- If Applicable: If you use part of your home exclusively for business, you may be eligible to deduct expenses related to that portion of your home.
Understanding these taxes can help you budget effectively and utilize available tax benefits. However, tax laws can be complex and subject to change, so consulting with a tax professional is advisable and crucial to ensure you comply with all tax laws and maximize deductions.
