Go to the notebook page
Buy Home Tips

A place to prepare, not a push to purchase

Topic file 18 of 20

Taxes for homebuyers

Taxes show up in a home purchase long before your first return as an owner: in the monthly escrow payment, in prorations on the Closing Disclosure, and in the rules for tapping retirement savings. This file maps where they appear and which official source governs each.

Taxes are part of homeownership from the first month. Property tax is set locally by counties, cities and school districts, and it is usually paid through your mortgage escrow account. Federal income tax rules govern what you can deduct, how points are treated, and what happens if you use retirement savings for the purchase. Those federal rules change, which is why every guide in this file with a tax figure states the tax year it applies to. This overview stays general on purpose.

Property tax and your payment

Lenders usually collect property tax monthly and pay the bill from your escrow account. The estimate on your Loan Estimate is based on information available when you apply, which may be the seller's current bill. If the purchase triggers a reassessment, or if the seller had exemptions such as a homestead exemption that do not transfer to you, your bill and your monthly payment can rise after the first escrow analysis. Ask the county assessor how sales are handled and which exemptions you can apply for, and note the application deadlines.

Prorations at closing

Property taxes are often paid in arrears or in advance depending on where you live, so the Closing Disclosure includes adjustments between buyer and seller for the part of the tax year each owned the home. Prorations can look confusing, but the idea is simple: each side pays for its share of the year. Your settlement agent can explain each line.

Federal deductions

The IRS explains in Publication 936 how the home mortgage interest deduction works and its limits, and in Publication 530 which home-related expenses are deductible and which become part of your cost basis. Deductions only matter if you itemize. Keep your Closing Disclosure and the annual mortgage interest statement your servicer sends, because both are used when you file.

Retirement savings and the down payment

Some buyers consider their IRA or workplace plan as a source of cash. The IRS has a specific exception from the additional tax on early IRA distributions for a qualified first-time home purchase, with a lifetime limit and a definition of first-time homebuyer. Workplace plans have different rules, including plan loans. The guides in this file state the tax year for every figure and walk through examples, because getting the details wrong can cost both tax and retirement growth.

Records to keep

Many tax questions about a home come up years after the purchase, when you sell. Keep the Closing Disclosure, the deed, records of points and property tax paid at closing, the annual mortgage interest statements and receipts for improvements. Improvements can increase your basis, and IRS Publication 530 explains how these records relate to it. The IRS also advises keeping property records until the period of limitations expires for the year you dispose of the property. Keep any retirement plan loan or IRA distribution paperwork with your closing file too, along with the forms you filed for that year. The guides in this file label every tax figure with its year, so check the year before you rely on a number.

When the bill changes after a sale

The tax bill shown in a listing reflects the seller's history, not your purchase. In some states a sale resets the assessed value to market value. California issues supplemental bills after a change in ownership, and those bills go to the owner rather than to the lender that pays the regular bill from escrow. Florida ends the seller's Save Our Homes cap and assesses the home at just value the following January, though a new owner can apply for a homestead exemption and may be able to carry over part of a prior Florida benefit. Exemptions tied to the seller generally do not transfer to you, so apply for your own by the local deadline. Ask the county assessor how a sale is treated, estimate the bill using your price and have your lender escrow for that figure, not the seller's. The proration and reassessment guides show the arithmetic.

How to use this file

Start with the guide to IRA withdrawals for a first home, which includes a calculator and is labelled with its tax year. Then read the site's long read on mortgage interest and taxes. For property tax, contact your county assessor early, because exemption deadlines can be easy to miss in the first year.

Guides in this file

  1. Borrowing from a 401(k) for a down payment: limits and risks

    The IRS loan limit, the home-purchase repayment rule and the job-change risk.

  2. Homestead exemptions: lowering property tax on the home you live in

    File once for the home you live in, and your taxable value drops.

  3. Using an IRA for a first home: the first-time buyer exception

    The lifetime exception, the first-time buyer test and the 120-day clock, with worked examples.

  4. The mortgage interest deduction: who benefits and how much

    Helpful only if your itemized total beats the standard deduction.

  5. Are mortgage points tax deductible? How the IRS treats points

    Points on a main-home purchase can often be deducted in the year paid.

  6. Property tax basics for first-time buyers

    The bill that follows the house, and why the seller's bill can mislead.

  7. Property tax proration at closing

    Proration makes sure you pay only for the days you own the home.

  8. Property tax reassessment after you buy

    The seller's tax bill reflects the seller's history, not your price.

  9. Tax records for homeowners: what to keep and for how long

    The papers that decide how much of a future sale is taxable.

Related reading on this site

Questions buyers ask

Will my property tax stay the same as the seller's?

Not necessarily. In some places a sale triggers a reassessment, and the seller may have had exemptions you will not have until you apply. Ask your county assessor how a purchase affects the assessed value and which exemptions you can claim.

Does buying a home automatically lower my income tax?

No. Deductions for mortgage interest and property taxes only help if you itemize and your itemized deductions exceed the standard deduction. Many owners take the standard deduction. The IRS publications listed here explain the rules for each tax year.

Sources checked for this page

Checked November 2026. Programs and limits change; confirm with the source before you rely on a figure.

All topic files