Dear Tax Talk,
When’s the best time to buy a home as far as getting the best tax incentives? Should I choose a closing date before or after year-end?
The best time to buy a home is early in the year to maximize your tax deductions. The best way to explain this is by example.
Suppose you’re considering buying a home where your monthly mortgage interest and taxes will be $1,000, your points on the loan are $2,000, and your other itemized deductions, such as state income or sales taxes and charity, are $2,000. If you pay the mortgage for 12 months, your itemized deductions would total $16,000 ($12,000 interest/taxes, $2,000 points and $2,000 other). The standard deduction, which is taken in lieu of itemized deductions, for 2012 is about $12,000 for a married couple and $6,000 for a single filer. If you close in December, you won’t have enough to itemize regardless of filing status, which means you’ll lose deductions — especially, you’ll lose the points deduction.
Another reason: Say you’re single and plan to withdraw $10,000 from your individual retirement account for a first-time home purchase. If you do this in January, you’ll pick up $10,000 in income but offset it with $16,000 in deductions, which will mean you’re ahead in tax deductions by making the purchase. If you do this in December, you’ll be behind on tax deductions.
Ask the adviser
To ask a question on Tax Talk, go to the “Ask the Experts” page and select “Taxes” as the topic. Read more Tax Talk columns.
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.