January 11, 2022 | Sexton Real Estate Group
Are you considering buying a home in California? If so, there are some important tax facts you need to know. In this article, we will highlight the top 10 tax facts you should know when buying a home in California. So, whether you’re a first-time homebuyer or seasoned pro, be sure to read on for essential information that could save you money on your taxes.
1. A Tax Credit Is A Financial Amount That You May Deduct From Your Tax Bill
There are two types of tax credits: refundable and nonrefundable. A refundable tax credit means that you may receive a payment from the government even if your tax bill is zero. A nonrefundable tax credit, on the other hand, can only be used to reduce your tax bill to zero; it cannot give you payment from the government if your tax liability is already zero.
2. The Mortgage Credit Certificate allows homeowners to deduct a portion of their mortgage interest from any federal taxes owing to the IRS
The tax credit is equal to the principal residence mortgage interest.
If you spent $24,000 in 2018 on your home (interest and property taxes), then that amount will be subtracted from any federal taxes owed when filing next year’s tax returns.
Some areas of California also offer a state income tax deduction for property owners who pay their local school district’s parcel tax or special assessments. These are paid separately every fiscal year, so it can only reduce their taxable income by about one-third each year. This means they would have to pay three years’ worth of these taxes up front just to get estimated savings off of their annual income tax bill for this calendar year alone!
3. The Homebuyer Credit Is A Tax Break That Helps Reduce Your Federal Income Tax Liability
When you purchase a home in California, you may be eligible for the Homebuyer credit. This tax credit is available to taxpayers who buy a home as their principal residence. You can claim the full amount of the credit if your purchase price was less than $800,000. If your purchase price was more than $800,000, you can still claim a partial credit.
4. The Mortgage Interest Deduction allows California homeowners to deduct the number of their mortgage payments on their state income taxes
The current federal law limits this tax benefit for everyone except those who are considered high-income earners. Anyone can claim it, but most people do not qualify due to the specific requirements needed in order to take advantage of this valuable deduction.
Those who live in states where real estate property or sales taxes are higher than average usually reap even more benefits if they happen to be able to deduct some of these charges as well!
For example, let’s say you purchased an $800,000 home with 30 years of fixed-rate financing at an annual percentage rate (APR) of four percent and your total monthly payment comes out to be $3300. In this case, you would be able to deduct $12,000 from your taxable income on your state return.
5. The Homeowner’s Property Tax relief program was enacted in order to provide some tax relief for homeowners who live in counties with high property taxes and low median incomes
The maximum benefit that a homeowner can receive under this program is $70 per year or $1400 over a 20-year period. To qualify for this program, you must own and occupy the home as your principal place of residence and it must also be your only primary residence. You must also meet certain age and disability requirements, file an annual application, and
If you itemize deductions on your federal income tax return, mortgage interest paid on a personal residence may be deductible up to a maximum of $750,000 ($375,000 if married filing separately).
However, there are limitations based upon your adjusted gross income (AGI) as well as other rules that apply. This means it’s important to consult a tax professional to help you determine whether or not your deduction will be beneficial.
6. The Mortgage Debt Forgiveness Act of 2007 allows homeowners who have been forced into bankruptcy due to the economic downturn after 2008 to waive any remaining mortgage debt that was forgiven by their lender as part of their bankruptcy proceedings
This act is set up in order to give borrowers relief from continuing financial obligations even though they are no longer able to make payments on time, and it also helps them avoid foreclosure-related issues down the road.
This forgiveness provision enables struggling homeowners (and those who were facing imminent default) to keep filing for Chapter 13 protection instead of having an additional $250,000 worth of non-dischargeable debt thrown back at them when their case is finally settled.
7. The state’s property tax deduction allows taxpayers to subtract the amount of their property taxes from their taxable income on their state income taxes.
In order to claim this deduction, you must own and occupy the home as your principal place of residence and it must also be your only primary residence. The maximum benefit that a taxpayer can receive under this program is $70 per year or $1400 over a 20-year period.
8. When you sell a property that has increased in value since you purchased it, you may have to pay capital gains tax
This tax is calculated as a percentage of the profit made on the sale, and it depends on how long you’ve owned the property. If you’ve owned your home for less than a year, you will likely owe taxes on the entire profit. However, if you’ve owned it for longer than one year, only the profits made after one year will be subject to taxation.
There are some exceptions to this rule: if you sell your home because of a job relocation or other unforeseen circumstance, or if it was used as your main residence for at least two out of five years before the sale, you will not be required to pay capital gains tax on your profits.
Capital Gains Tax can range anywhere from 0–39% of your total profit depending on how long you’ve owned the property and what percentage of it was used as the main residence.
9. The Average Effective Property Tax Rate In California Is Just 0.73%.
That’s lower than the national average of 1.07%. So, while your taxes may be higher here than in some other states, it’s still relatively affordable when compared to others.
However, keep in mind that your specific tax bill will vary depending on where you live in California.
10. State Transfer Tax In California Varies Depending On Where You Are Buying A Home
While most homes throughout the majority of California have a standard rate, there are some areas that may be more or less expensive than others. For example, if you were planning on investing in real estate within San Francisco then your taxes would vary greatly from those who live outside this area.
If you are buying a home in California, there are two types of transfer taxes you should be aware of: the documentary fee and the state transfer tax. The documentary fee is charged by county governments and is generally a percentage of the purchase price.
The state transfer tax, on the other hand, is a flat rate that is assessed by the State of California. For most counties in California, the state transfer tax rate is 0.55%. However, certain counties have higher rates. In Marin County, for example, the rate is 0.65%.
Whether you are buying your first home or looking to upgrade, understanding the tax implications is very important. You may be eligible for a few exemptions that can save you thousands of dollars in taxes! Call us today and let’s go over how these 10 facts about California real estate taxes will affect you before it’s too late.
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!