A First Time Homebuyer's Guide to Taxes

Home buyers pre-pay prorated property taxes at closing.

Home buyers pre-pay prorated property taxes at closing.

Becoming a home buyer for the very first time is often an exciting occurrence. First-time home buyers have many things to prepare for, including closing the sale on their new homes. One issue that sometimes confuses first-time home buyers, though, involves real estate taxes due when they purchase their homes and as they continue to own them. As homeowners, they can claim several regular real estate tax deductions.

Pre-Paid Property Taxes

Homes are legally transferred to their new owners at home sale closings. Home buyers frequently must pay what are called "pre-paids" at their sale closings, with such pre-paids including upfront payments of prorated property taxes they'll owe. For example, upon your home purchase's closing date you may be responsible for 76 days of property taxes. Your upfront pre-paid tax payments when you buy a home are normally due on the day you close on your home.

Regular Property Taxes

Once you're the new owner of a home, you assume responsibility for paying the property taxes assessed on it. Generally, local government taxing bodies such as counties and municipalities assess properties in their jurisdictions and then levy taxes based on their assessed values. Property taxes attach to the properties themselves and owners pay them semi-annually or even just annually. Remember; many homeowners have lost their homes to delinquent property taxes when government taxing bodies finally foreclosed to recover them.

Property Sales Taxes

Whether home buyers or home sellers pay sales taxes on their home sales transactions varies by state. Some states require home sellers to pay sales taxes, which may be called "documentary transfer taxes." Other states require home buyers to pay any sales taxes. California is mixed when it comes to home sales taxes and who pays. Southern California home sellers pay documentary transfer taxes while buyers in Northern California pay them and either sellers or buyers in Central California pay.

Property Tax Deductions

As new homeowners, first-time home buyers may not be aware they're allowed to claim federal and state deductions for property taxes.Property taxes fall under what the IRS calls "real estate taxes," and property owners can deduct those taxes. Most states also mirror federal tax law when it comes to property taxes and allow for their deduction as well. Claim your property tax deduction for federal taxes on IRS Form 1040, Schedule A whenever you itemize your taxes.

Mortage Escrow Accounts

If you're buying a home using a mortgage, your lender may require you to "escrow" your property taxes. Mortgage borrower escrow accounts exist because lenders want to make sure their borrowers don't lose their homes to tax foreclosure. A common condition for mortgage loan approval is a borrower's agreement that regular prorated property tax payments will be paid into a lender-established escrow account. Mortgage lenders then make their borrowers' property tax payments from the escrow accounts their borrowers fund.

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