If you are considering buying a house with someone else or have already done so, you’re probably wondering how to file your taxes.

Whether you're a first-time homeowner or an experienced property investor, there are some key steps you should take to ensure your taxes are handled properly when purchasing a home with someone else.

Key Takeaways

• Understanding your ownership status is essential to filing taxes after buying a home, as it will impact the deductions you are eligible for and how you file.

• It is typically more beneficial to file your taxes jointly with co-owners of the property to maximize mortgage interest and property tax deductions.

• Homeowners can take advantage of various tax deductions, including those for mortgage interest and points, state and local property taxes, private mortgage insurance premiums, energy-efficient upgrade credits, and more.

1. Consider What Your Ownership Status Is

Before diving into tax filing, it's essential to understand your ownership status as this will significantly impact how you file taxes after buying a house. 

Here are the top three ownership statuses and what each entails:

Joint Tenancy

Joint tenancy occurs when two or more people hold an equal ownership interest in a property. This means that each person has an equal right to use the property, and upon the death of one owner, their interest is automatically transferred to the surviving tenant(s).

Regarding tax implications, each joint tenant can deduct their share of mortgage interest and property taxes on their tax returns.

Tenancy in Common

Tenancy in common means that two or more people own a property together, but unlike joint tenancy, their shares can be unequal, and there are no survivorship rights. If one tenant dies, their share goes to their estate rather than the co-tenant(s). 

Each tenant in common can deduct their portion of the mortgage interest and property taxes, relative to their ownership percentage, on their tax returns.

Tenancy by the Entirety

Tenancy by the entirety is a special form of ownership that is available only to married couples or, in some states, domestic partners. Like joint tenancy, there are survivorship rights, meaning if one spouse dies, the surviving spouse becomes the sole owner of the property. 

For tax purposes, if the spouses file jointly, they can deduct the total amount of mortgage interest and property taxes paid. If they file separately, the deductions are typically divided based on each spouse's ownership interest.

2. File Jointly (Most of the Time)

Most homeowners find that filing taxes jointly simplifies the process and often leads to greater tax benefits. This is particularly true for married couples or registered domestic partners who co-own property. 

You can combine your income and deductions by filing jointly, usually allowing for maximized mortgage interest and property tax deductions.

However, there are certain situations where filing jointly may not be advantageous. For example, if you or your spouse have high medical expenses, then filing jointly could disqualify you from the medical expenses deduction.

Similarly, if one owner has significant debts or unpaid child support, filing separately could protect the other owner's share of any tax refund.

3. Deduct Mortgage Interest

The mortgage interest deduction is one of the key tax benefits available to homeowners. This deduction allows homeowners to reduce their taxable income by the interest paid on their mortgage throughout the tax year. 

Mortgage Interest Deduction Basics

As part of your monthly mortgage payment goes toward interest on the loan, the IRS allows you to deduct this expense from taxable income and lower your overall tax liability.

To claim your mortgage interest deduction, itemize your deductions on Schedule A of your tax return.

Splitting Mortgage Interest Deduction Between Joint Owners

The mortgage interest deduction is usually straightforward for co-owners who file taxes jointly, as they can claim the total amount of interest paid.

However, if the co-owners file separately, they must split the mortgage interest deduction based on their ownership interests. Each co-owner must report their share of the mortgage interest on their individual tax return.

Limits on Mortgage Interest Deduction

There are some limits to the mortgage interest deduction. The deduction is generally allowed on mortgage debt up to $750,000 ($375,000 if married and filing separately) for loans taken out after December 15, 2017. 

For loans taken out before this date, the limit is $1 million ($500,000 if married and filing separately).

Military and Ministers Housing Allowance

Members of the military and ordained ministers may be eligible for a housing allowance, which can affect their mortgage interest deduction. The housing allowance is generally tax-free but can be used to cover housing expenses, including mortgage interest. 

In these cases, the homeowner can still claim a mortgage interest deduction on the portion of interest not covered by the housing allowance.

4. Deduct Home Mortgage Points

Mortgage points are fees you pay to your lender at closing in exchange for a reduced interest rate. Each point typically costs 1% of your mortgage amount, and these points are essentially prepaid interest on your loan. 

Because they're prepaid interest, the IRS allows homeowners to deduct them, just like mortgage interest. However, there are certain criteria you must meet to qualify for this deduction.

The criteria to be met include:

• The mortgage must be for your primary residence, and paying mortgage points should be a standard practice in your local area. 

• The points must be calculated as a percentage of your mortgage and be clearly marked on your settlement statement. 

• The points must be paid directly, without borrowing the funds from your lender or mortgage broker. 

If you meet these requirements, you can deduct the full amount of the points in the year they were paid. If not, you may still be able to deduct the points over the life of the loan, with a process known as amortization.

5. Deduct State and Local Property Taxes

As a homeowner, you're likely paying local or state property taxes, which are generally based on the assessed value of your home. The good news is that these property taxes can often be deducted from your federal income tax return. 

However, it's important to note that the Tax Cuts and Jobs Act, implemented in 2018, capped the total state and local tax deduction, which includes property taxes, at $10,000 ($5,000 if married and filing separately). 

This means you can only deduct the amount of property taxes and other state and local taxes combined up to these limits. 

To take advantage of this deduction, you must itemize your deductions on Schedule A of your tax return.

6. Deduct Home Mortgage Premiums

Another potential deduction for homeowners comes in the form of mortgage insurance premiums. If you put down less than 20% on your home purchase, your lender likely required you to purchase private mortgage insurance (PMI). This insurance protects the lender if you default on your loan.

Under certain circumstances, the premiums you pay for private mortgage insurance can be deducted from your federal tax return. The ability to claim this deduction is based on your adjusted gross income (AGI). 

If your adjusted gross income is $100,000 or less ($50,000 or less if married and filing separately), you can deduct the full cost of your private mortgage insurance. 

For those with higher income, the deduction starts to phase out, and it disappears entirely for taxpayers with an adjusted gross income above $109,000 ($54,500 if married and filing separately).

7. Note All Home Improvements

As a homeowner, it's vital to document all home improvements. These improvements aren't immediately tax-deductible, but they're important when selling your home.

The money spent on improvements increases your home's cost basis, which in turn reduces your capital gain when you sell, and lower capital gain means less tax owed. 

So, while you can't deduct home improvements right away, they can help limit your tax bill later. Always consult with a tax professional for accurate tracking and documentation.

8. Mortgage Interest Credits if You’re in a Lower-Income Household

Financial difficulties can arise for various reasons, and homeowners are not exempt from such challenges. Fortunately, there are programs designed to assist those facing financial hardships.

A credit you can take advantage of is the mortgage interest credit, a tax credit provided by the IRS to help lower-income individuals afford home ownership. If you qualify, you could reduce your tax bill on a dollar-for-dollar basis.

You need a Mortgage Credit Certificate (MCC) from your state or local government to receive this credit. The MCC will show the mortgage interest rate, which you can claim on IRS Form 8396.

9. Energy-Efficient Tax Credits

Recent updates have significantly expanded the benefits of energy-efficient tax credits. Starting in 2023, the tax credit for installing certain energy-efficient upgrades will increase from 10% to 30%. This means that energy-efficient upgrades, like solar panels, will be 30% cheaper.

The spending limits have also been raised to $1,200 per year, a significant jump from the previous $500-lifetime limit. This means you could qualify for up to $12,000 of this tax credit over its ten-year life from 2022 through 2032.

10. Pay Your Home Mortgage Fully

It's crucial to ensure that your home mortgage debts are fully covered, even if you aren't technically or legally responsible for the entire amount. This is especially important when co-owning a property, as both parties are generally liable for the mortgage. 

If one party fails to meet their financial obligations, it could lead to serious consequences, such as foreclosure or damage to your credit score.

If the other party is not fulfilling their financial responsibility, consider seeking legal action. Consult with an attorney specializing in real estate law to explore your options for holding the other party accountable.

11. Prepare the Documents You’ll Need

Document preparation and storage is a crucial part of tax filing for homeowners. Some of the important documents include:

• IRS Form 1098

• Mortgage Credit Certificate

• Settlement Statement

• Property Tax Statement

• IRA Withdrawal Documents

• Home Improvement Invoices

• Insurance Loss Documentation

• Form 8829

Keeping track of all these documents can be a challenging task. Luckily, with Trustworthy, you and the co-buyer of the house can organize all your tax and family documents in a safe place and access them as needed.

If you’re hiring a tax professional to help you and the co-buyer of the home file your taxes, you can share these documents securely through the trustworthy system by adding them as a “collaborator”.

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