When is the best time of year to buy a house for your tax situation?

The housing market in 2021 is still booming. A post-pandemic rebound due to mortgage rates that are holding steady for the time being, job recoveries, and a low inventory, has resulted in a buyer demand that is still high.

If you’re considering buying a house, when is the best time to purchase it? Experts say that fall, especially October,  may be the optimal time. If you wait to buy a house in the fall, you’ll be able to take advantage of some tax benefits. 

Knowing when to close the deal can work to your advantage when tax time rolls around.  You may want to think about postponing a December closing until January of the following year if that provides you with a benefit on your tax return.

How does the closing date affect your taxes? The first thing is to determine if taking the additional tax deductions allowable when purchasing a home — points, interest, and property taxes — will be most beneficial to your tax liability in the current year vs the coming year.

If you have an end of year closing, you’re allowed to take those allowable deductions in the year purchased, even if your closing is on December 31st. If you want to increase your deductions for the coming tax year, wait to close on your house in January.

It’s not all about your first mortgage payment

If you’re getting a mortgage to buy your new home and will be paying points, this expense is an allowable tax deduction. Points are non-recurring closing costs and are fully deductible in the year paid. 

Prepaid and prorated interest as well as prorated property taxes are also deductible in the year that they’re paid. You’ll be charged interest from the date of your closing to the beginning of the period that’s covered by your first mortgage payment. 

If you close on your house in December, your first monthly payment would begin to accrue in January and would then be payable at the beginning of February. If you close in January of the new year, then your first monthly payment would be due in March, and so forth. The amount of prorated interest you’ll have to pay may be something you want to take into consideration before choosing a closing date.

It’s important to assess your tax liability for both the current tax year as well as the future year to determine whether it’s in your best interest to close at the end of the year or to wait to do it in the new year.

More to consider

Purchasing a new house is one of the biggest financial undertakings you’re likely to make. For tax purposes, the answer to the question of when is the best time to buy a house is going to depend on your tax liability. A CPA can help you understand all of the tax implications as well as the benefits you can get from purchasing a new house.

With offices in Ontario and San Diego, GYL CPAs and Advisors, the best personal CPAs in Southern California, provide a full range of tax services for individuals. Call to schedule a free consultation.