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Life Events & Tax Planning – Part V: Buying a Home

Home with For Sale Sign

Buying your first home is one of the biggest financial decisions that you will make in your lifetime, so it is imperative for you to take the time to prepare yourself in every aspect before finalizing the process.

It is easy to get caught up in the excitement and stress of purchasing a home. First and foremost, you must analyze your monthly cash flow and create a budget that takes into consideration all your current expenses plus all additional expenses that inevitably come with owning a home. Some of the big ticket items include but are not limited to your mortgage payment, real estate taxes, car payments, utilities, student loans, education costs for dependents, insurance and repairs–but that’s just the tip of the iceberg. What about eating and commuting costs? Shouldn’t you have funds left over for entertainment? Vacations? Your “rainy day” fund?

This blog presents some important issues we urge you to consider when planning to purchase your first home. There are also a number of tax advantages to purchasing a home that you will want to be aware of well before you begin your search.

This includes looking into special programs that offer assistance in helping buyers find properties that fit their budgets, grants and other sources of funding. There are many grant options available based not only income limit but other circumstances such as profession (i.e. special grants for teachers, farmers, etc.) as well as the geographical area of the property (is it in a rural area? A high-poverty area?). It is recommended to research all the grants and funding options for which you might be eligible before you automatically decide you don’t qualify for anything.

So the day has finally come when you find your dream home and pick up your keys at the closing. You are in the neighborhood you always wanted to live in, the school district is great, your commute is ideal and you have assured yourself that you can afford the home. Yes, you will be spending a lot to purchase and maintain your home, but there are also several tax advantages to home ownership that you should take note of.


As you’re getting ready to buy your home, consider pulling some funds from an IRA to help cover a down payment or other costs. First-time homebuyers who decide to use their IRAs to come up with the down payment do not have to pay the 10% penalty normally applied to pre-age 591/2 withdrawals.

At any age you can make a one-time withdrawal of up to $10,000 penalty-free from your IRA to help buy or build a first home for yourself, your spouse, your children, your grandchildren or even your parents. (If you are married, you and your spouse each have access to $10,000 of IRA money penalty-free.) To qualify, the money must be used to buy or build a first home within 120 days of the time it’s withdrawn.

Perhaps the biggest tax break after buying a home is the mortgage interest deduction. This deduction covers interest paid on up to $1 million worth of loans, and is especially beneficial for borrowers with new mortgages, since interest tends to be frontloaded during the term of the mortgage. Note that you would need to file an itemized tax return to claim the mortgage interest payment deduction.

Taxpayers who itemize their deductions on Schedule A are also eligible to deduct real estate taxes paid on their primary and secondary residences. Note that the tax paid must be for a home you own; you can’t claim taxes you paid on someone else’s property.

If you are a self-employed business owner who works from home, you can take a deduction for the room or space used as your office. This deduction can include expenses like mortgage interest, insurance, utilities, and repairs, and is calculated based on the percentage of your home devoted to your business activities.

Once you’ve purchased and are living in your new home, you should keep track of all home improvement costs, as they can actually reduce your tax bill if you sell your house in the future. Should you choose to sell your home, keep in mind that if you meet certain criteria you can actually exclude up to $250,000 ($500,000 if married) of the gain.

Owning your first home is a life milestone and is easily one of the biggest financial risks you will take. With thorough planning and a little patience, though, you can make the assessments necessary to zero in on and purchase your dream home. Even if you feel like you’re not prepared to buy a home, you now have some of the knowledge you’ll need for when you finally are ready.

This blog series is meant to provide an overview of the common implications you might face when you encounter various life events, but there are likely additional considerations dependent on your specific scenario. At FF&F our experienced staff will act as your advisors throughout each step of any event that might affect your tax planning. For more information on this topic, or to discuss tax planning strategies, please contact us at info@fffcpas.com or (212) 245-5900.

Lounise - HeadshotLounise George, MBA, is a Tax Manager who has been with FF&F for 10 years. She has over 15 years of accounting experience, and since joining FF&F has worked with a diverse group of clients. Lounise specializes in High Net Worth Individuals & Non-Profit Organizations.