Tax Information for First Time Home Buyers

Every year my taxes are getting more and more complicated. My 2006 return consisted of both income from Illinois and Massachusetts. My 2007 return added self-employed income for the first time. My 2008 return added a solo 401k account and a home purchase. Looking towards the future, my 2009 return will add itemized deductions. I took advantage of the tax software to do some research on the tax system with regards to the first-time home buyer tax credit, mortgage interest and real estate taxes.

First Time Home Buyer Tax Credit

All you need to know about the first-time home buyer tax credit, bullet style:

• Tax credit up to $7,500 (10% of value of home less than $75,000)
• You must have closed on your home between April 9, 2008 and July 1, 2009
• First-time home buyer = haven’t owned a principal residence in the US in the previous three years
• Phase out between AGI of $150,000 and $170,00o for married and $75,000 and $95,000 for single filer
• Refundable tax credit
• Recaptured over 15 years (1/15 of the credit per year) beginning two years after credit is claimed
• Interest free
• If you sell your house prior to complete repayment, the rest is paid at time of sale with earnings from sale
• If you sell at a loss the remaining payback is forgiven

Mortgage Interest Deductions

In general, you may deduct your mortgage interest if your mortgage balance does not exceed $1,000,000 and you took out your mortgage to buy, build or improve your home. Here are the fine details, in numerical list style:

1. Mortgage was taken out on or before 10/13/1987 (Grandfathered in)
2. Mortgage was taken out after 10/13/1987 for the purpose of buying, building or improving your main home and backed by your main home
3. Mortgage was taken out after 10/13/1987 for the purpose of buying, building or improving your second home and backed by your second home
4. In the cases of 2 and 3 above, all mortgage balances must be $1,000,000 or less at all times throughout the year
5. Mortgage was taken out after 10/13/1987 and was no used to buy, build or improve your main home, but the mortgage balance must be $100,000 or less at all times throughout the year and does not exceed the main or second home’s value.

Wow, pretty confusing. Mine will definitely be deductible. Considering I nearly reached the standard deduction value with two months of mortgage interest and self-employed tax deductions, I am in line for a pretty large deduction increase next year. (IRS Pub. 936 has more info about mortgage interest).

Real Estate Taxes

Real estate taxes are significantly easier to understand. You can deduct real estate taxes that you paid on your home throughout the year. That’s it. Well, almost. The amount of money you pay to your escrow throughout the year is not the amount that you deduct. The amount you deduct is the amount that was actually paid to the IRS.

Does anybody have any advice for a new home owner with regards to taxes?