If a real estate move was part of your financial picture for 2023, you should be aware of some of the effects the purchase or sale of a home has on your income taxes.
BUYER OF PRIMARY RESIDENCE
When purchasing a primary residence, the main tax benefit is the ability to deduct the mortgage interest the buyer pays on the new mortgage loan. The IRS also allows a deduction for real estate taxes and private mortgage insurance (sometimes referred to as “PMI”). However, the buyer should also carefully scan their closing statement and look for loan origination fees (“points” paid on the purchase), because the IRS allows these fees as a deduction as well. The other fees associated with the closing, title insurance, survey fees, recording fees, commissions, hazard insurance, etc. are not deductible but are included in the total basis the owner has in their new home.
SELLER OF PRIMARY RESIDENCE
When selling a primary residence, the selling party may deduct the interest and real estate taxes as they typically would. They may also deduct the costs associated with the sale including, commissions, attorney fees, closing costs, transfer fees, title insurance, and other closing costs the seller was required to pay to close the transaction.
BUYER OF INVESTMENT PROPERTY
When purchasing an investment property, the closing statement is a crucial document when the investor files their future tax returns. The purchase price, along with the closing costs, is typically added together and this makes up the basis of the property. The basis of the real estate is then depreciated over the life, meaning a piece of the cost will be taken each year on the tax return as a deduction. Certain costs, condo fees/HOAs paid by the seller on the closing statement, reserves for property taxes or insurance, and interest are fully deductible.
SELLER OF INVESTMENT PROPERTY
The seller of investment property also relies on the closing statement to guide the tax implications and the profit or loss realized on the sale. The seller may deduct most costs such as attorney fees, closing costs, appraisal fees, commissions, recording fees, and title charges against the amount they received in proceeds.
– Guest post by Andrea F. Schnurr CPA, Farris & Associates CPA PLLC in Louisville, KY (502) 339-8311 farriscpas.com*
*Always contact a tax professional for advice. Any tax advice contained in this article is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed on any taxpayer or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.