Buying a House With Cash? Here’s What to Know About Taxes
What's the deal with buying a house with cash and taxes? We look at income taxes, property taxes, and federal recording for cash buyers.
Buying a house with cash seems like a straightforward approach: lower closing costs, fewer hurdles, less hassle. While that’s mostly true, there are some elements that may be a little less transparent: property taxes, income tax deductions, and tax reporting.
We spoke with Ken Crotts, a graduate of the Real Estate Institute for Investing who practices in Seattle, to discuss some of the tax implications of purchasing a home with cash.
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What tax breaks do homeowners receive?
In general, homeowners are allowed to take certain deductions on their taxes. Deductions reduce the amount of your taxable income, which in turn lowers the amount of your taxes owed (and possibly your tax rate).
Typical deductions include:
- Property taxes. The amount you pay in property taxes is deductible on your federal income taxes, up to a limit of $10,000 if you’re married and filing jointly, or $5,000 if you’re single or married and filing separately. As a cash buyer, this is a deduction you could claim.
- Mortgage interest. Interest paid on a home loan is tax deductible with some limits. But as a cash buyer, this wouldn’t apply to you because you don’t have a loan.
- Mortgage insurance premiums. Similarly, mortgage insurance (MI) premiums can be deductible depending on your income, but cash buyers wouldn’t be able to claim this either.
- Mortgage points. Mortgage points (which are really just interest paid upfront) can be deducted for the tax year the loan was signed. But — you guessed it — cash buyers don’t get this deduction.
It’s important to remember that tax deductions are not tax credits. Deductions affect your taxable income, the amount of money you make that is taxed. Credits reduce your bottom-line tax liability, the amount that you owe, or in some cases, increase your refund. Homeowners are entitled to deductions, not credits.
