First-time homebuyers' guide to taxes
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"Exemptions have to do with how much property
tax you're ultimately paying," says Gronsky. "The taxes
are assessed on the value of your house. It may be worth $200,000,
but if you get a $40,000 exemption for being a veteran or every
homeowner gets that amount, you will be paying taxes on just $160,000
The types and amounts of homeowner real-estate-tax
exemptions vary greatly across the United States. Check with your
local officials about what's available and what you need to do to
qualify for the exemptions.
"Even before you buy, you should find out from
your settlement attorney, real estate agent or county officials
what exemptions and deductions you do get," says Kass.
10. Planning ahead
After you finish your first tax return as a homeowner, use it to
plan for the next one.
In early December,
Kass says, "ask yourself,
'Do I need more deductions
this year?' 'Am I making more
money this year or will I
next year?' 'Can I prepay
my January (mortgage) payment
and real estate taxes in December?'
"At the end of the year, if you feel you can
use an added mortgage interest deduction this year instead of the
next year, as long as you make the payment early (by Dec. 31), you
can deduct it. The same with property taxes. Pay them this year
to deduct them on your next return."
Also be sure to hang onto your HUD-1 sheet. Remember
all those charges you couldn't deduct on your return? They can be
added to your home's basis. The basis, which is the total of your
purchase price plus closing costs plus any substantive improvements you make to the residence, is what you subtract from the sales price
you receive to determine your profit.
"Capital improvements are things like putting
on a new roof, redoing the kitchen, remodeling the bathroom,"
says Gronsky. "A lot of people do these things even before
they move in.
"They're not deductible this year but might help
you when you sell the house in terms of how much capital gains you
have to pay."
If you're single, you can make up to a $250,000 profit
on your home and not owe any taxes on the money as long as you've
lived in the house two out of the last five years prior to the sale.
Couples who file jointly get twice that exclusion amount. If your
home's value appreciates substantially, the items added to the basis,
if you keep track of it, could help you keep your profit in the
"Set up a record-keeping system that helps you
track your home-related costs and does so in a way you can retrieve
the information if the IRS wants to get a look at it," says
Also, Kass says to "absolutely hang onto to HUD-1
for three years after you sell your last house." That's how
long the IRS has to come back and look at your return.
But even if you have no audit concerns whatsoever,
it's a good idea to hold onto this document since it's a record
connected to what's probably your largest personal investment.
Updated: Jan. 10, 2008