First-time homebuyers' guide to taxes
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Most people escrow real estate taxes, says Garwitz. Here you give your lender a portion
of your annual property tax bill each month along with your payment
of principal and interest on your loan. At closing on a home, lenders
usually collect from you, the buyer, a portion of your coming tax
bill (around three to six months' worth is typical) for the escrow
When your property taxes are due,
the lender takes that money and uses it to pay your local tax collector.
In the example above, you cannot write off this amount
on your first tax return after purchasing the house, because, even
though it's designated for deductible property taxes, the amount
was simply collected, not actually paid.
When your lender does pay your property tax bill the
next year with that escrowed money, then you'll get to deduct the
amount on the returns you file for that tax year.
Financial institutions usually report the amount of
property taxes paid on your behalf on the Form 1098. It's a good
idea, though, to double-check your actual property tax bill to make
sure the correct amount was paid, says Garwitz. The county should
send you, the owner, a copy of the bill that it sends to your lender
6. Timing is everything
Now that you know all the new-home-related deductions
you can claim, you've probably already gone to Bankrate's tax
form library to download a Schedule A.
Not so fast. With taxes, timing is everything.
While in most cases homeowners will benefit from
itemizing, the time of year when you actually closed on your house
could make a big difference in your deduction method choice.
"Not everybody should consider itemizing,"
says attorney Kass, who also writes the weekly "Housing Counsel"
column for The Washington Post.
"If you settle later in the year, you'll have
very few deductions for mortgage interest and taxes, so it might
be better to use the standard deduction amount."
Gronsky says new homebuyers should "run it both
ways" to see if, by itemizing their deductions, they will exceed
the standard deduction amount.
"Most of the time, when they just purchased the
house, because the mortgage payment is mostly interest and very
little principal, typically itemizing is better," she says.
"But if they got into the house in November, for 2007 taxes
it may not be better.
"On the other hand if they got in January or
February, itemizing probably will be better."
When calculating your itemized deductions, also be
sure to count other nonhousing items. For example, you can now take
tax advantage of any charitable contributions you made in the year
that you bought your house.
"Young people buying their first home usually
don't worry about keeping records of charitable donations because
they've been using the standard deduction for years," says
Garwitz. "Now they can add those contributions to the deductible
costs associated with their new home to come up with a larger itemized