A simple guide to homebuyer taxes
When it comes to closing on a home, the taxes due—and the tax breaks—can be a bit of a mystery.
If you’re a first-time homebuyer, you may not be aware of the tax implications at all. If you’ve owned your home for a long time, or are buying in a different state, the tax situation may be quite different from what you’ve encountered in the past.
Taxes are complicated and location-specific, and change from year to year, so we strongly suggest you consult a tax professional for help. This article is meant to serve as a general overview so you can set your expectations. It also assumes you'll be taking on a mortgage; if you buy a home in cash, the tax implications are quite different.
The taxes you owe at closing
The two main taxes you owe at closing are transfer taxes and property taxes.
Transfer taxes are a one-time fee paid to your local government for their service updating your home’s title and transferring it to you. This fee can vary greatly depending on where the home you’re purchasing is located; in some areas, you’re required to pay a percentage of the loan amount for your mortgage.
Property taxes fund public services in your neighborhood, like roads, police and fire departments, and public schools. Each county determines how often property taxes are due; for instance, every six months, every three months, every two months, once a year and so on. If the seller paid property taxes that stretch beyond the closing date, you’ll reimburse them for those taxes in your closing costs.
Your mortgage lender will collect your property taxes and pay them for you to prevent you from defaulting on your mortgage and having your property seized by the government. At closing, your lender will collect at least enough to pay the next tax installment, which depends on how often the county collects taxes. You may owe up to a year’s worth of property taxes at closing.
Unlike the transfer tax, property taxes are percentage-based, so the more expensive your home, the higher your property taxes.
Possible benefits at tax time
In the past, most homeowners could deduct mortgage interest from their taxes. That changed in 2017, with the combination of tighter restrictions and a higher standard deduction.Footnote1 Here's what you should know.
The U.S. government allows you to take itemized deductions for:
- Mortgage interest on up to $750,000 of a home mortgage
- Mortgage points (fees a borrower pays a mortgage lender to lower the amount of interest they pay over the term of the loan)
- PMI (private mortgage insurance)
- State and local property taxes
Not everyone benefits from itemized deductions. To take advantage of them, the amount of those deductions has to exceed the standard deduction granted to every taxpayer by the government. In 2023, the standard deduction is $13,850 for single filers, $20,800 for heads of household and $27,700 for joint filers.
Your tax professional will add up your itemized deductions: If they exceed the standard deduction, you'll be able to use the itemized deductions to decrease the amount of income you owe taxes on; if they do not exceed the standard deduction, you'll have to take the standard deduction.
If you have other itemized deductions, such as business expenses and charitable donations, those would be added to the mortgage and property tax deductions, and may help you exceed the standard deduction.
Your mortgage lender will send you Form 1098 each year to report how much mortgage interest you paid in the previous calendar year.
Now that you have a clear picture of the tax implications of closing on a home, you have one less thing to worry about and can focus on the joy of homeownership. Happy house hunting!
A note from your lending specialist
If you're ready to buy a home, I can help answer your questions and review your home loan options.
1 Mortgage Interest Rate Deduction: What Qualifies for 2023. Tina Orem, Nerdwallet, January 13, 2023. Accessed July 2023.
MAP5821959 | 08/2023