January 11, 2022 | Sexton Real Estate Group
There are a lot of misconceptions out there about taxes and buying a home. We’re going to take a look at five lies you’ve been told about taxes and buying a home that will help you make the right decision for your situation.
You Should Buy A House When Interest Rates Are Low Because It Will Help You With Tax Deductions
While mortgage interest is tax-deductible, other factors such as the size of your loan and your income level may impact how much of that deduction you actually receive. And if you’re in the market for a new home, don’t forget to factor in property taxes and closing costs.
The truth is, you can buy a home whenever you want. Buying when interest rates are low may help with your tax deductions, but it’s not necessary. In fact, if you’re not ready to buy or don’t want to commit to a mortgage yet, you can always rent. There are many benefits to owning a home, whether interest rates are high or low.
This is one of the biggest myths about buying a home and taxes. While there may be some truth to this, most people can’t afford to buy their first home until they’ve paid off any high-interest rate debt like student loans or credit cards – which means your tax advantage may never happen!
And even if you do get these savings on your income taxes, chances are that in today’s market where property values have dropped so much recently, those deductions won’t amount to very much at all. It might just put an extra couple hundred dollars back in your pocket each year rather than thousands.
There’s no guarantee that interest rates won’t go up, but even if they do, it might not be as high as what you’ll pay in mortgage payments each month. When deciding to buy or rent, consider how long it would take for the extra money spent on mortgage payments to outweigh the cost of renting over those years.
The More Expensive Your Home Is, The Higher Your Tax Deduction Will Be
The Tax Cuts and Jobs Act of 2017 changed a lot about the tax landscape, including what counts as a deductible expense when it comes to buying a home. Previously, homeowners could deduct interest on up to $100,000 in mortgage debt, but that deduction is now capped at $750,000. And while the new law doubled the standard deduction for all taxpayers, it also eliminated many other deductions that were popular among homeowners—including the state and local income tax deduction and the moving expenses deduction.
So does that mean that if you buy an expensive home, your tax bill will be higher? Not necessarily. The increased standard deduction may end up being enough to offset any lost deductions from owning a more expensive home. And even if it’s not, the mortgage interest deduction is still available for up to $750,000 in mortgage debt.
So don’t let anyone tell you that buying a more expensive home means you’ll pay more taxes—the truth is that it all depends on your individual tax situation.
You Have To Pay Capital Gains Tax When You Sell Your Home
One of the most common myths about taxes and home buying is that you have to pay capital gains tax when you sell your home. But this isn’t actually true—in fact, homeowners can often exclude up to $500,000 (or $250,000 if you’re single) from their taxable income when they sell their home.
There are a few caveats, of course. Your home must have been used as your main residence for two out of the last five years in order to be considered a “qualified” sale under this tax break. But if you meet these requirements, congratulations—you won’t pay any capital gains taxes on the profits from selling your home!
This is one example where it’s better to buy than rent when buying a house because you won’t have to pay extra taxes at the end when selling!
Having More Children Will Increase Your Tax Return
No, it’s not true. Having more children will not increase your tax return. In fact, you may even get a smaller return if you have more children. The amount of money you can claim for each child decreases as the number of children you have increased. So don’t count on getting a bigger refund just because you added to your family!
This is a myth that has been told to parents for decades, but it’s simply not true. So even though there are some tax breaks when having children and owning a home together (like deductions on property taxes), one should avoid this assumption about receiving more money back from their filing after adding another kid onto the roster!
Child Tax Credits phase out when income reaches $75k for single filers and $110k for married filing jointly so this is not an accurate claim.
You Need to Report Your Home’s Fair Market Value
Another common tax lie is that you need to report the fair market value of your home when you file. This isn’t true at all! There is no need to report the FMV of your home on your taxes. You only need to report if you sold your home or if it was used as a rental property. So don’t worry – you don’t have to do any extra work just because someone told you this was something you needed to do!
The IRS doesn’t require homeowners to declare the value of their homes, so this information is not necessary on your return.
The fair market value reported on your federal income tax returns only needs to be related to the amount you actually paid for the home or how much it was worth at the time of purchase if purchased within one year prior to the closing date. This information can help minimize capital gains risk when selling a home by providing documentation showing that you didn’t experience any substantial increase in value from the time of purchase.
We’ve already debunked five of the most common lies about taxes and buying a home, but there are plenty more to go. If you want to learn how to take advantage of tax deductions when you buy your next house or if you have any other questions related to this topic, give us a call today! Our team is ready and waiting for your phone call so we can set up an appointment with one of our experts who will be happy to answer all of your questions in depth. You don’t need another lie that’s going to cost you time and money; just pick up the phone now!
Are You Looking to Buy a Home in Northern California?
The top real estate agency in Northern California, Sexton Group Real Estate in Berkeley, California is a boutique real estate company specializing in residential sales for properties throughout the San Francisco Bay Area. To better serve our clients we have three local offices, one in the heart of picturesque Berkeley, one near downtown Oakland and the third in the heart of historic Lafayette, California. The Sexton Group encompasses the essence of Berkeley’s charm, Oakland’s history and Lafayette’s family-oriented vibe all with a relaxed, down-to-earth nature. We are an amazing group of real estate agents whose wealth of experience spans more than 25 years in the industry. Looking to buy a home in Contra Costa or Alameda County? Contact us today for your free consultation!