Tax Day is right around the corner. And although you’ve probably (hopefully!) already filed for 2019, there’s still a lot to learn about taxes when it comes to homeownership that can be useful all year long. We’ll discuss the link between homeownership and taxes, the tax advantages of being a homeowner, and how the Knock Home Trade-In benefits you when it comes to paying Uncle Sam.
When buying a home, you should be aware of what you’ll have to pay on top of just the mortgage. With knowledge about what you’ll owe when it comes to taxes, you won’t be faced with any hidden surprises that seem like a blow to your bank account.
The amount of taxes you’ll pay are based in the assessment of your property. A property tax assessment is what determines the market value of your piece of property. Assessments are usually done once a year, but the timing varies by jurisdiction, and properties are reassessed when a home is sold to a new buyer. These assessments are performed by the government and they're most often based on recent sales of comparable properties in the area.
“When there is a transaction, the property taxes get reassessed based on the purchase price. You have to report what price you bought the home for, and the property tax is assessed from there.”- Jamie Glenn, Knock Co-Founder & COO
Of course, when it comes to purchasing a home, a major factor is the area you choose to buy in. Many states, counties, and municipalities have their own laws and regulations when it comes to taxes. Be sure to research the tax requirements of the area you’re moving to and consider the current property taxes there.
Knock Property Accountant Tiffany Scott said, "I would advise for buyers to become as familiar as possible with “SALT” (state and local taxes) in the area that they would like to complete their real estate transaction. Great savings are out there if you know where to look."
Here are some tax fees you can expect:
Property taxes are typically paid either twice or four times a year and are paid in advance. Because of this, as a buyer, you will reimburse the seller for the property taxes they already paid from the date of the sale until the end of that tax period. You’ll see these property taxes as part of your overall closing costs. Keep in mind that you can deduct up to $10,000 in property taxes from your income tax filing, as long as they are itemized.
It may be required by your state, county, or municipality that a tax is added onto the cost of a home when the property is transferred from one owner to another. Typically, this will be a percentage of the purchase price of the house. For example, in Knock market Atlanta's state of Georgia the transfer tax “is based upon the property's sale price at the rate of $1 for the first $1,000 or fractional part of $1,000 and at the rate of 10 cents for each additional $100 or fractional part of $100.” Although the seller is liable for this payment, the buyer typically picks up the cost.
When it comes to selling a home, although you typically won’t pay sales tax, you could face taxes on your capital gains.
Capital gains are defined as the difference between what you pay for an asset and what you sell it for. When tax time comes, you are allowed to exclude up to $250,000 if you’re single ($500,000 if you’re married) from your gains, as long as you’ve lived in the home for more than two years. Note that if your home isn’t your primary residence, these exclusions don’t apply.
Now we may have got you nervous thinking about the taxes you’ll have to pay, but don’t worry – there are definite benefits to being a homeowner. Owning your own space and building equity along the way are obvious perks. But, there are also advantages when tax time rolls around. Below, we’ll discuss some of the ways you can save money as a homeowner when it comes to filing your annual income taxes.
Did you know that you can write off the interest on your mortgage? As long as your loan is $750,000 or below, you are entitled to receive a deduction on the entire interest payment you made within that tax year.*
As mentioned above, you can deduct property taxes from your income tax, up to the amount of $10,000, as of 2018. Both your main residence and other owned real estate properties are eligible.
If you have a space within your home that is designated as an office, or is a storage space for business-related items (like merchandise), you may be able to claim a deduction.
Although you typically can't benefit from home improvement costs at tax time, being energy efficient can help. Making changes to your home like adding solar power or wind energy can not only help your energy bill (and the environment), but also come tax time.
"Taxpayers who make energy-saving improvements to a U.S.-based primary residence may be able to take a credit to offset the cost of repairs if the work is completed in 2018," writes Jerry Gaddis, founder & CEO of Tropical Tax Solution in U.S. News & World Report.
Make sure you take advantage of these homeownership benefits when filing your yearly income taxes.
*If you took out your mortgage prior to December 16, 2017, your interest deduction limit is for a loan of up to $1 million. The Tax Cuts and Jobs Act (TCJA), effective 2018-2025, has lowered the limit by $250,000.
Although there are various ways you can claim deductions as a homeowner, there are some things you can’t add to that list. Keep these items in mind when you’re considering a new home purchase:
Now you know what you can expect when it comes to taxes associated with owning, buying, and selling homes. So let’s discuss how using the Knock Home Trade-In program can help you financially when you are selling one home and buying your next – at the same time.
Selling your old home with Knock means that we’re prepping your house and listing it on the open market in order to get you as the seller the best price possible on the sale. When it comes to pricing your home, Knock has a dedicated team of data scientists, home valuation specialists, and licensed real estate experts that help value your house. We also have a proprietary algorithm that incorporates current homes for sale, recent transactions in your neighborhood, and our 200-point on-site inspection to ensure any improvements and unique features of your home are used to price it accurately. Because you are not selling your home directly to Knock, you’re able to entertain all offers to maximize your profits.
“Because we’re selling your home for fair market value instead of buying it directly from you at a price below what it’s worth, you’re able to get the most capital gains from the sale.”- Jamie Glenn, Knock Co-Founder and COO
Knock currently operates in six markets across the United States. And moving across state lines may help you save even more come tax time. With the new tax reform laws, as mentioned above, you can only deduct up to $10,000 in property taxes ($5,000 for a single filer). Therefore, considering a new location with lower property taxes could help your wallet.
The costs associated with buying and selling at the same time add up, and most people have the majority of their funds tied up in the home they are selling. With the Knock Home Trade-In program, Knock first buys your new house on your behalf with our cash so you can move in as soon as possible. Our all-cash offer is attractive to sellers, and typically gets us an average 3-5% discount off of the list price of the home. To illustrate, let’s say the house you love has a list price of $300,000, but Knock’s all-cash offer allows us to secure it at a price of $285,000. That’s a significant savings that can help offset some of the other costs of buying and selling at the same time, like taxes. If you didn’t leverage Knock’s all-cash buying power, you may have paid asking or above asking price for the home. By saving on the purchase price, Knock helps you maximize the amount of money in your pocket.
Even in a situation where competition is pushing bids up on the new home and Knock cannot get our typical discount, there are still tax-related benefits to using our Home Trade-In program. For instance, say you are trying to move into your new home in a different school district before the academic year starts, so you can enroll your children in their new school on time. On your own, you may not be able to afford and time getting into your new home before your kids need to start at their new school. With the Home Trade-In, Knock covers all costs on the new home, like property taxes, until your old home sells, and then settles with you at closing. By covering these costs upfront, Knock makes it possible for you to afford moving into your new home before the old one sells. That way, you can focus on what’s most important to your family’s timeline.
Buying or selling a home is a major life event that requires decision-making, effort, and patience. There are plenty of exciting elements of being a homeowner, which is why at Knock, we strive to make the entire process of buying and selling easier than ever before. Of course, homeownership comes with major responsibilities, like paying required taxes. Luckily, the Knock Home Trade-In program helps you on both ends of the spectrum, to maximize your profits when you sell and save you money when you buy. Get started today at knock.com, and reap the benefits come tax time next year.
This article is meant to provide a high-level overview of select points tied to taxes and homeownership, home buying and home selling, and should not be viewed as comprehensive. Any and all questions should be directed to an accountant or financial advisor for details and clarification.
Make sure to speak with your lender about any additional questions you may have about your mortgage and taxes.
Many tax laws are based on state, county, or municipality. Research your specific location’s tax laws and requirements.