Should I close on my house (buyer) in 2011 or 2012?

December 20, 2011 8:32 AM

If I have the option, is it more advantageous for me to close on a house (tax wise) in 2011 or 2012?

I am a first time home buyer. I am buying a single family home using a 203(k) loan and am getting ready to close. My closing is set for next Wednesday (12/28).

I am wondering if there are any tax implications I should consider that make it more advantageous to close in 2011 vs. 2012.

Things to consider:
* I've earned $30,000 in 1099 (consulting income) this year that I need to pay taxes on in January.

* I'm tearing the existing house down and rebuilding a 3-unit apartment building in its place -- I'll live in one and rent the other two out. Right now, the plan is that the project is move-in ready by July 2012. I anticipate actually moving in August or September 2012.

*I will need the rental income to make the mortgage payments after a few months.

There is no longer a first time home buyer credit, but since I'll be renovating, I'm expecting to take advantage of other credits for energy efficiency etc.

If you need more information to help pro/con this, please let me know.

I know you are not an accountant, but I'd like to crowd source this to have a little more to noodle on and research before calling my accountant later on today.

Thanks in advance!

posted by batcrazy to home & garden (11 answers total)

What country are you located in?
posted by dfriedman at 8:50 AM on December 20, 2011

The reference to a 1099 and a 203(k) loan makes it quite reasonable to assume the OP's in the USA.
posted by Tomorrowful at 8:54 AM on December 20, 2011

The pro rata property taxes, interest (3 days worth) and points paid at closing can be deducted this year if you itemize, which might lower any amount you owe. Look at your closing statement and see what those amounts are. Or you can use them on next year's taxes.
posted by shoesietart at 8:54 AM on December 20, 2011

Is the $30k in consulting income your only income for the tax year? Because if it is, at that level of income, you would very likely not be itemizing your deductions and your income tax liability is pretty darned low such that any deductions would likely have a net effect of zero.

Depending on the nature of home loans, it is sometimes advantageous to have the closing in one year or another, in order to "bunch" deductions on Schedule A in one year. So for instance, points associated with the loan may be deductible on Schedule A as mortgage interest, etc. Closing costs and other costs associated with the loan may also be deductible. That said, I don't know enough about construction loans and 203(k) loans to offer an informed opinion as to whether interest payments associated with those loans could even be claimed on Schedule A.

However, if you're not itemizing your deductions, it's very likely that none of the loan-related deductions (if they applied at all) would matter.

I guess a full answer to this question would also require some assessment of what your expected tax liability would be in the next tax year (income sources, etc.) and what your deductions would like like then, too.
posted by QuantumMeruit at 8:58 AM on December 20, 2011

You really should seek the help of a professional tax advisor to give you crucial financial advice like this.
posted by crunchland at 9:18 AM on December 20, 2011

My very novice advice is to close in 2012 unless you already plan to itemize. Your closing costs are likely to be less or close to the standard deduction, so you probably won't itemize this year. However, in 2012, you may well have enough mortgage interest to itemize your taxes, in which case being able to itemize closing related items would be a nice bonus.

Again, I'm just a novice. I did a bit of research since I closed on a house this year and was wondering if I would be able to itemize. It turns out I won't be able to this year, but will be able to next year.
posted by parakeetdog at 9:20 AM on December 20, 2011

I am in the US.
posted by batcrazy at 9:39 AM on December 20, 2011

The 1099 income is in additional to my full-time salary.

The seller is paying almost all the closing costs, I believe property taxes for 2011 have already been paid, and I would only be paying 3 days of interest this year.

That said, if I can itemize all of the deductions next year (interest on mortgage seems to be the big one) then there doesn't seem to be a "penalty" for closing this year vs. next year.

Crunchland -- I will be seeking the advice of an accountant, but I frequently us regular folk have a wide variety of experience that I wouldn't even think to bring up with my accountant, which is why I thought I'd crowdsource the answer first.
posted by batcrazy at 9:44 AM on December 20, 2011

This goes more to closing costs than taxes, but in my experience the buyer has to come up with the pro-rated mortgage for the remainder of the month plus the following month. So if you defer to the beginning of January you'd have to pay almost two months mortgage up front.
posted by exogenous at 12:46 PM on December 20, 2011

I think you're unlikely to get more than issue-spotting from the responses here. What a good accountant will do for you is to estimate your 2012 taxes with the closing in this year, and compare that against the estimated 2012 taxes with the closing in the next year.

If you are not itemizing deductions this year, but are planning on itemizing deductions next year, that also leads to various tax-planning advice, like defer charitable contributions until next year, etc.
posted by QuantumMeruit at 1:20 PM on December 20, 2011

You also need to make sure that the zoning allows you to tear down the house and put in an apartment buildling. I know that in my neck of the woods the county and city are very strict about such things.
posted by frecklefaerie at 2:35 PM on December 21, 2011