Buying a home comes with a host of tax benefits. Before you are able to take advantage of the common deductions and credits associated with home ownership, you must close on the property and pay applicable local taxes. The amount you pay in taxes when buying a new home varies depending on where you live.
A real estate property tax is due at closing and is paid by the seller, buyer or both. The party responsible for the property taxes is usually outlined in the real estate purchase agreement. Property taxes are paid to cover the remaining annual balance owed to the local jurisdiction. One exception to this rule is when the closing date falls on the date annual property taxes are due. In most cases, however, negotiations are made between the buyer and seller to determine a fair arrangement for paying taxes on the property.
Buyers are required to pay a tax on the transaction when buying a new home. Similar to sales tax, the real estate transfer tax is based on the transaction amount. The transfer tax rate varies by local government. A stamp is generally made on the property deed when the tax is paid to legitimize the transaction before the deed is recorded. This tax is also called document or transaction stamps.
In addition to property taxes, local taxing authorities may charge additional fees to cover neighborhood improvements or one-time services. For example, if a new sidewalk is under construction, taxes may be adjusted for the coming tax year to reflect the improvement. Also, if your new home requires special governmental services, such as water delivery, the local municipality might impose an additional tax to cover the service provided to you. If a private agency handles special services in your area, arrangements can usually be made outside of closing to cover these fees.
Some of the tax you pay at closing becomes tax deductible at the end of the year -- for example, the prorated property taxes you pay to cover the remaining annual balance. You are not able to claim transfer tax or taxes paid to your local government for special services to your new home. As of 2011, real estate taxes paid to a taxing authority, interest that qualifies as home mortgage interest, and mortgage insurance premiums are the only taxes the IRS allows as a deduction.
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