Tax Deductions When Buying or Selling a Home

(February 2025)

Tax Deductions When Buying or Selling a Home

In This Article

Property taxes are vital for funding public services, and a major source of revenue for the local governments. Yet, the traditional process of paying them can be a hassle. That’s where online payments come in, offering homeowners convenience and benefits like saving time, avoiding late fees, and ensuring accuracy and security. That’s pretty cool! Isn’t it? Of course, it is.

Paying property taxes online lets you choose flexible payment methods like credit cards or ACH, tailoring it to your budget. Moreover, you may also qualify for a federal income tax deduction. The article gives you some tips that make your online property tax payments a breeze.

Tips for online property tax payment:

  1. How to Pay Property Taxes Through Your Mortgage
  2. How to Pay Property Taxes Directly to Your Local Tax Office
  3. How to Claim a Property Tax Deduction on Your Federal Income Tax Return

Want more? Keep reading!

1. Understand What Tax Deductions Are

See tax deductions like gifts from the government. With them, you can keep more of your hard-earned money. When you buy or sell a home, you may get some deductions depending on your situation. For example, when you buy a home, you can deduct the points you pay to lower the interest you pay on your mortgage loan and the property taxes you pay to the state.

When you sell a home, you can also deduct the costs you incur to make the sale. But know that the tax deductions are not always easy to claim. You need to follow the rules and keep the records. Also, file the right forms and know the name of the deductions you are eligible for and their limits.

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2. Know Some Common Tax Deductions for Buying Home

Do you know that buying a home is a big decision that can have a significant impact on your taxes? You may be able to save money by claiming some of the following tax deductions:

  • Prepaid mortgage interest (points): If you paid a fee to your lender to get a lower interest rate on your loan, you can deduct it in the year of purchase.
  • Mortgage interest: You can deduct the interest you pay on your mortgage loan, up to a limit of $750,000 for loans you take out after December 15, 2017.
  • Property taxes: You can deduct the property taxes you pay on your home, up to a limit of $10,000 for both state and local taxes combined.

To claim these deductions, itemize your deductions on Schedule A of your tax return, instead of taking the standard deduction. You also need to keep records of your payments and receipts. These deductions can lower your taxable income and reduce your tax bill.

How to Qualify for Tax Deductions for Buying Homes

If you want to qualify for tax deductions for buying homes, you need to know the following:

  • You can only deduct home ownership expenses if you itemize your deductions on Schedule A of your tax return, instead of taking the standard deduction.
  • You can deduct prepaid mortgage interest (points) if you paid a fee to your lender to get a lower interest rate on your loan, and if it meets certain criteria.
  • You can deduct mortgage interest if you pay interest on your mortgage loan, up to a limit of $750,000.
  • You can deduct property taxes if you pay taxes on your home, up to a limit of $10,000 for both state and local taxes combined.

How to Deduct Tax for Buying a Home

Here are some steps to follow on how to deduct tax for buying a home:

  • Determine if you are eligible for any tax deductions related to your home purchase, such as prepaid mortgage interest (points), mortgage interest, and property taxes.
  • Keep records of your payments and receipts for expenses, as well as your settlement or closing statement that shows the amount of points you pay.
  • File your tax return using Form 1040 or Form 1040-SR and itemize your deductions on Schedule A, instead of taking the standard deduction.
  • Enter the amount of points you paid on line 8a of Schedule A, the amount of mortgage interest you pay on line 8b, and the amount of property taxes you paid on line 5a.
  • Attach Form 1098, Mortgage Interest Statement, from your lender to your tax return, if you received one.
  • Consult a qualified tax professional before filing your tax return, as tax laws are complex and subject to change. They can help you determine your eligibility and optimize your tax savings.

3. Know Common Tax Deductions for Selling Home

If you sell your main home and make a profit, you may be able to reduce your taxable income by claiming some common tax deductions for selling a home. Here are some of them:

  • Selling expenses: Deduct the costs associated with selling your home, such as commission fees, escrow fees, advertising costs, and legal fees, as long as they are directly related to the sale and you meet the ownership and use tests.
  • Home improvements and repairs: Deduct the expenses you incur for home improvements and repairs that were necessary to sell your home.
  • Capital gains exclusion: Exclude up to $250,000 of the profit you made from selling your home ($500,000 if married filing jointly).

How to Qualify for Tax Deductions for Selling Homes

According to the IRS, you can qualify for tax deductions for selling homes if you meet the following conditions:

  • Your home is your main residence, not an investment property.
  • You have owned and lived in the home for at least two out of the five years before the sale.
  • You have not excluded the gain from the sale of another home within two years before the sale.

How to Deduct Tax for Selling Home

Here are some steps to follow on how to qualify for tax deductions for selling homes:

  • Make sure your home is your main residence, not an investment property, and that you have lived in it for at least two out of the five years before the sale.
  • Keep records of your selling expenses, such as commission fees, escrow fees, advertising costs, and legal fees.
  • Keep records of your home improvements and repairs that are necessary to sell your home.
  • Calculate your capital gain or loss by subtracting your adjusted basis (the original purchase price plus improvements) from your sales price (minus selling expenses).
  • Exclude up to $250,000 of your capital gain from your income ($500,000 if married filing jointly).
  • Report the sale of your home on Form 8949, Sales and Other Dispositions of Capital Assets, and Schedule D, Capital Gains and Losses, of your tax return.

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Recap

In conclusion, buying or selling a home can have a significant impact on your taxes, but you can also take advantage of some tax deductions that can lower your tax liability and increase your savings. Whether you are a home buyer or a home seller, you may be able to deduct some of your expenses, such as mortgage interest, property taxes, selling costs, home improvements, and repairs, and even some of your profit.

However, to qualify for these deductions, you need to meet certain criteria, follow certain rules, and keep certain records. You also need to itemize your deductions on your tax return, instead of taking the standard deduction.

Tax laws are complex and constantly changing, so you can consult a qualified tax professional before filing your tax return. By knowing what deductions you can claim and how to claim them, you can make the most of your home ownership and save money on your taxes.

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. . For comprehensive tax, legal or financial advice, always contact a qualified professional in your area. S’witty Kiwi assumes no liability for actions taken in reliance upon the information contained herein.

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