Taxes are a fact of American life, and owning a home comes with its own tax issues. Some are only one-time taxes, such as those associated with closing costs. However, property taxes are recurring fees that are due every year.
• Transfer Tax – A one-time closing cost tax. This is the tax buyers pay to state and local governments when the title of the home passes from the seller to the buyer. The amount due varies widely depending on the local city and state.
• Escrow Deposit – A one-time closing cost tax. The escrow deposit is not a tax in and of itself, but most homeowners must pay at least two months of property taxes along with two months of mortgage insurance payments at closing.
• Property Taxes – A recurring home ownership tax. This is the big one when it comes to taxes, and it is an annual tax owners must pay based on the value of their home. A local public tax assessor periodically assesses the value of the home. Owners should expect small changes in property taxes as their home rises and falls in value. Typically, lenders include property taxes in monthly mortgage payments so that borrowers have to pay a small fee each month instead of one large sum each year.
The good news about property taxes is that only local and state governments charge these fees, and use them to provide local services. The federal government allows owners to deduct property tax from their federal income taxes. This extra deduction means that home owners may pay less in federal taxes than apartment renters who cannot claim the property tax deduction. Keep in mind, however, that this deduction only includes
property taxes and does not take into account taxes paid for utility services and home renovations or repairs.
Property taxes also appear in closing cost fees. Most major lenders require borrowers to pay at least six months in property taxes upon closing. For those who purchase expensive homes with high property taxes, this easily adds another thousand dollars to the closing cost fees.
• Utility Taxes – A recurring home ownership tax. Utilities are services provided by either the local government or businesses. They include power, water, and trash removal. The amount depends on the state sales tax, which sets the rate for taxes for goods and services.
• Home Renovations – A one-time tax. This is the amount of sales tax homeowners spend when renovating a home. It either comes from buying the renovation materials for DIY homeowners, or from the fee a renovation company charges for its services. Much like utility taxes, the amount spent on home renovation taxes depends on the sales tax rate for the state.
Taxes vary widely by state and local governments, so it is beneficial for homeowners to look at local tax rates before closing on a home. Some are small, such as the transfer tax or utility tax. Others add up to thousands of dollars per year like the property tax issued by local and state governments.