Buying a home in Texas can be exciting, but it’s important to ensure you know all the tax implications. To help, we’ve compiled this brief Q&A guide on the most common tax questions about buying and owning a home in Texas.
What are the tax benefits of homeownership?
In Texas, homeowners receive many tax benefits for buying homes. These include being eligible to deduct mortgage interest payments from your income taxes and receiving deductions on property taxes. Homeowners may also qualify for exemptions from certain taxes on their purchases.
Are there any additional taxes I should be aware of?
Yes. In Texas, some homeowners may be subject to additional local taxes, such as school district, county, and development district taxes. Additionally, standard state sales and use tax apply when purchasing a home in Texas.
Are my closing costs taxed?
No. Closing costs in Texas are not taxable and therefore do not need to be included in your tax returns.
Do I still pay property tax after I buy a house?
Yes. Texas property taxes are due annually and must be paid by January 31st of each year. The amount of property tax owed will depend on the appraised value of your home and other factors.
Are homestead exemptions available to me as a homeowner?
Yes. Homes in Texas may be eligible for homestead exemptions that reduce their assessed values and lower their property taxes. Eligible homeowners may receive up to a 20% exemption on their home’s value through homestead exemptions.
Are there any other exemptions or deductions available to Texas homeowners?
Yes. Seniors over 65 may qualify for additional exemption from property taxes. Disabled veterans may also qualify for additional exemptions and deductions from both state and local taxes on their homes. Additionally, some homeowners may qualify for energy-saving deductions if they make certain home improvements.
What is the Mortgage Credit Certificate program?
The Mortgage Credit Certificate program allows first-time home buyers to use a special federal income tax credit. This program allows buyers credit in qualifying for the tax advantage they’ll receive after they purchase the home.
The amount of the credit is tied to a local formula that every city with an MCC program must follow. An MCC credit, totaling $2,000 or more reduces the borrower’s federal tax liability by an amount tied to how much one pays in annual mortgage interest. The borrower’s income and the home’s purchase price must fall within established guidelines.
Call your local housing or redevelopment agency to see if your community has an MCC program. You also may inquire with your real estate broker or the local association of Realtors.
Are taxes on second homes deductible?
Interest and property taxes are deductible on a second home if you itemize. Check with your accountant or tax adviser for specifics.
What home-buying costs are deductible?
Any points you or the seller pay for your home loan are deductible for that year. Property taxes and interest are deductible every year.
But while other home-buying costs (closing costs in particular) are not immediately tax-deductible, they can be figured into the adjusted cost basis of your home when you go to sell (any significant home improvements also can be calculated into your basis). These fees include title insurance, loan-application fee, credit report, appraisal fee, service fees, settlement or closing fees, bank attorney’s fees, attorney’s fees, document preparation fees,s and recording fees.
How do you choose between buying and renting?
Homeownership offers tax benefits and the freedom to make decisions about your home. An advantage of renting is not worrying about maintenance and other financial obligations associated with owning property.
There also are several economic considerations. Unlike renters, homeowners who secure a fixed-rate loan can lock in their monthly housing costs and make prudent investment plans knowing these expenses will not increase substantially.
Homeownership is a highly leveraged investment that can yield substantial profit on a nominal front-end investment. However, such returns depend on home-price appreciation.
“For some people, owning a home is a great feeling,” writes Mitchell A. Levy in his book, “Home Ownership: The American Myth,” Myth Breakers Press, Cupertino, Calif.; 1993.
“It does, however, have a price. Besides the maintenance headache, the amount of after-tax money paid to the lender is usually greater than the amount otherwise paid in rent,” Levy concludes.
As for evaluating the risk associated with home ownership, David T. Schumacher and Erik Page Bucy write in their book “The Buy & Hold Real Estate Strategy,” John Wiley & Sons, New York; 1992, that “good property located in growth areas should be regarded as an investment as opposed to a speculation or gamble.”
The authors recommend that prospective buyers spend a few months investigating a community. Many people make the mistake of buying in the wrong area.
“Just because certain properties are high-priced doesn’t necessarily mean they have some inherent advantage,” the authors write. “One property may cost more than another today, but will it still be worth more down the line?”
What is a home mortgage deduction?
The mortgage interest deduction entitles you to completely deduct the interest on your home loan for the year you paid it. You must itemize deductions to do this, which means your total deductions must exceed the IRS’s standard deduction.
Another point to remember is that the amount of interest on your loan goes down each year you pay on your mortgage (all standard home-loan formulas pay off interest first before significantly paying into principal). That’s why paying extra on your principal every year can help you pay off your loan early.
Should I buy a vacation home?
Today a vacation home can be purchased for investment purposes and enjoyment. And yes, there are tax benefits.
Some people buy a vacation home with the idea of turning it into a permanent retirement home, which puts them ahead on their payments. Another benefit is that the interest and property taxes are tax deductible, which helps to offset the cost of paying for a second home. A vacation home also can be depreciated if you live in it less than 14 days a year.
Are there tax credits for first-time home buyers?
Many city and county governments offer Mortgage Credit Certificate programs, which allow first-time homebuyers to take advantage of a special federal income tax write-off, which makes qualifying for a mortgage loan easier.
Requirements vary from program to program. People wanting to apply should contact their local housing or community development office.
Here is a list of four general requirements to keep in mind:
- Some credit may be claimed only on your owner-occupied principal residence.
- There are maximum income limits, which vary by locality and family size.
- You must be a first-time home buyer, meaning you must not have had any ownership interest in a principal residence during the past three years. However, this restriction may be waived if you are buying property within certain target areas.
- Allocations must be available. A local MCC program may have to decline new applications when it runs out of funds.
Are seller-paid points deductible?
As of Jan. 1, 1991, homeowners have been able to deduct points paid by the seller. This deduction was previously reserved only for points paid by the buyer.
How do I save on taxes?
Here are some ways to save money on taxes:
- Mortgage interest on loans up to $1 million is completely deductible for the year in which you pay it to buy, build or improve your principal residence plus a second home.
- Points, or loan origination fees, also are deductible no matter who pays them, the buyer or the seller.
- Most homeowners, except the wealthy and those living in high-priced markets, no longer need to worry about capital gains taxes. The exemption has been raised to $500,000 for married couples and $250,000 for single owners. It can be taken every two years. Homeowners should always keep all receipts of permanent home improvements and of mortgage closing costs. If you do have to pay capital gains taxes, these costs can be added to your adjusted cost basis. Consult your tax adviser for more information.
Resources:
- “Tax Information for First-Time Homeowners,” IRS Publication 530, and “Selling Your Home,” IRS Publication 523. Call (800) TAX-FORM to order.
