A reader rented till almost the end of 2018. Now he’s worried about what the IRS will expect from him.
Question: We rented our previous home for nine months out of this year. We bought our first home with cash – no loans, no mortgage, cash only in the 10th month. How would I file on my taxes that we rented but we’re now also first-time home buyers? – Kenny in Indiana
Tendayi Kapfidze, LendingTree chief economist responds…
Congratulations on becoming a first-time homebuyer, and for being able to pay cash. That’s quite an accomplishment!
Even though you don’t have a mortgage, there are still some tax deductions you may be eligible for.
The first one is for your property taxes. You only lived there a few months. So, the amount you’re able to deduct on your federal income taxes probably won’t be much. The seller will likely receive the bulk of the deduction for the property taxes.
If you made any energy savings improvements before the end of the year, you may be eligible for a residential renewable energy tax credit . These upgrades include the following:
- solar panels
- solar-powered water heaters
- wind turbines
- geothermal heat pumps
- fuel cells that rely on a renewable resource
Even though you can’t deduct them now, start keeping receipts for any improvements you make. If you later sell, they’ll be added to the price you paid to determine the cost for taxes.
You’ll likely need to pay taxes on the amount of money you make through appreciation when you sell your home. The higher your cost basis, the less you’ll pay in taxes on the money you make from the sale.
Unless you were writing off a portion of your previous home rental costs on your taxes — perhaps because you are self-employed or work from home — the amount of time that you were renting isn’t that important. If you’re an active duty member of the military, you will be able to write off moving expenses, but if not, unfortunately, the new tax law doesn’t allow you to deduct them.
Tax liability for the cash
But back to the cash you used to buy the home. You may need to discuss potential tax liability with a professional based on where the cash came from. If you cashed in an IRA or a retirement account, or if received a gift from family members, you or your relatives may need to notify the IRS that the funds were used to purchase a home…
- IRA: You can typically withdraw up to $10,000 from an IRA to buy your first home without a tax penalty. However, you’ll need to provide a 1099-R form to the IRS, along with a copy of your closing statement to verify the funds were used for your home to avoid that penalty.
- 401(k): You can loan yourself up to $50,000 from a 401(k) account without penalty, and there shouldn’t be anything needed in terms of tax documents. However, if you did any type of cash withdrawal and you are younger than 59½, you may be subject to early withdrawal tax penalties.
- Gifts from relatives: Gifts of up to $15,000 from a relative are not taxable, but anything over that may create a tax consequence for the relative you received the gift from. If they did gift over $15,000, they will have to file an IRS form 79.
Forms you’ll need to file taxes
Gather the following documents related to your home purchase so you don’t encounter delays when you file your taxes…
- Address change form: Make sure to file an address change form with the IRS to let them know your new address. If you take cash out with a mortgage in the future, lenders may need to verify your income using an IRS 4506-T transcript form. This form requires they verify the information on the tax returns you filed against the IRS database. If the address doesn’t match what you filed your returns with, the IRS will reject it and create potential delays in your mortgage approval.
- Closing statement: You’ll need to provide a copy of your closing statement to your tax preparer. This should show the sales price, how much you paid for it, any fees you might have paid related to the purchase, and any property taxes that were paid by you and the seller.
- Property tax bill: The local tax authority can provide a copy of your property tax bill. Very often the assessor’s office has an online tool for you to obtain the information using the legal description or something called the assessor’s parcel number.
- Receipts for any renewable energy upgrades: If you did make any renewable energy improvements in 2018, you’ll need to provide receipts and invoices to get any type of a deduction.
[For more information on filing this year, check out How to File Taxes.]
You mentioned “we” in your question — assuming you’re married and filing jointly. It’s possible the itemized deductions may not exceed the new increased standard deduction of $24,000. A professional tax consultant can give you information about whether to itemize your expenses or take the new standard deduction.
Denny Ceizyk , staff writer for LendingTree, contributed to this report.
Published by Debt.com, LLC