Home Ownership: Are You Ready?
The purchase of a first home is an exciting time in anyone’s life. It’s also a large financial undertaking, a fact that leaves many people wondering whether they’re prepared for this big step. The Society of Louisiana CPAs (LCPA) suggests you answer these questions to help you decide if the time is right for you.
What’s the Hurry?
Owning your own home is a tempting prospect, but make sure that you are not hurried into making a decision. Home sales have generally been slow for the past year, which makes it less likely a house you like will be bought overnight. Even when the market is hot, though, it’s best to look around in different neighborhoods and at various types of homes to see what you can afford and to be sure you have all the information you need.
How Much Will It Really Cost Me?
You are probably aware that you will need a down payment, of up to 20% of the home’s purchase price, to buy a home and that you will then make monthly payments on a mortgage that covers the rest of the total purchase price. Those aren’t the only costs of home ownership, however. You will likely also have to make monthly payments for local property taxes, utilities and home owners’ insurance, as well as cover one-time upfront costs for moving and any furniture or appliances you need. Consider also the price of any renovation or repairs the house may need, and for general upkeep of the home and property around it.
How Do Taxes Come Into It?
There are many potential tax deductions associated with home ownership that you should be aware of as you plan your purchase. For example, people are able to deduct the interest they pay on their home mortgage loan if they itemize deductions. In the early years of a mortgage, that interest is the lion’s share of your monthly payment, so this potential deduction is a good thing. That’s because when you take deductions, they lower your taxable income and, as a result, you end up paying fewer taxes overall. In many cases the points you pay on a mortgage loan may also be deductible. And, while real estate taxes are one of the costs you should be aware of, they are also deductible. All of these deductions added together could mean a little more money in your pocket each month.
What about the Home-buyer Credit?
The Senate recently passed a $24 billion bill to extend and greatly expand coverage of a housing tax credit. Under terms of the Worker, Homeownership and Business Assistance Act of 2009, this credit provides significant changes to all prior versions of this tax credit. This latest law allows homebuyers to claim a credit if they purchase a home by April 30, 2010 or enter into a binding contract to purchase a home by that date if they close on the home by June 30, 2010. As previously, taxpayers who make qualifying purchases in 2010 will be able to claim the credit on either their 2009 or 2010 tax return. Otherwise, to claim the credit for 2009, the qualifying purchase must be made prior to December 1, 2009.
In another major change, the credit is also modified to apply not just to first-time homebuyers. Under the bill, taxpayers who have owned and lived in their old house for any five consecutive years within the preceding eight years will be treated for purposes of the credit as first-time homebuyers. However, instead of the full $8,000 credit, such long-term residents would be eligible for only a $6,500 credit. The bill increases the income limitations for credit eligibility to $125,000 for individuals (and $225,000 for couples). It also introduces a purchase price limit: No first-time homebuyer credit will be allowed for the purchase of any residence if the purchase price is more than $800,000.
Your CPA Can Help
Your local CPA can help you determine how much house you can afford and what your monthly or one-time costs will be, as well as the tax effect of a home purchase. Turn to him or her with your important financial questions.
For more tax and financial advice, visit the Public section of the LCPA's website at www.lcpa.org.
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Pursuant to IRS Circular 230 and IRS regulations we inform you that any federal tax advice contained in this article is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties imposed under the Internal Revenue Code.
Copyright 2009 The American Institute of Certified Public Accountants.
