Buying a Home in Texas: What Changes on Your Tax Return

Parker County keeps adding rooftops, and every new homeowner eventually asks the same question the first spring after closing: what does the house do for my taxes? The honest answer is "it depends on whether you itemize," and there are a few things to handle in the first year regardless.

Mortgage interest

Interest on a loan secured by your main home (and one second home) is deductible if you itemize, subject to a limit on the size of the loan. Your lender reports the interest paid on Form 1098 each January. In the first year, the form covers only the months after closing, and some of the first year's interest may appear on the closing statement rather than the 1098.

The deduction only helps if your total itemized deductions exceed the standard deduction. For many households, especially with a moderate mortgage, they do not. We walked through the comparison in Standard Deduction or Itemize?.

Property tax

Texas property tax is where a homeowner's biggest recurring bill sits, and it is deductible if you itemize — but the combined deduction for state and local taxes is capped. Texas has no income tax, so the cap is consumed mostly by property tax and, for those who elect it, sales tax. Property tax paid through escrow is deductible in the year the lender actually pays it to the county, not the year you deposited it into escrow.

At closing, property tax for the year is typically prorated between buyer and seller. The buyer's share for the portion of the year they owned the home is shown on the closing disclosure and is deductible.

Points and closing costs

Points paid to obtain the mortgage on a main home purchase are generally deductible in the year paid, if they meet a list of conditions. Points on a refinance are usually spread over the life of the loan instead. Most other closing costs — title insurance, appraisal, survey, recording fees — are not deductible, but they are added to the basis of the home, which reduces the gain when you eventually sell. Keep the closing disclosure permanently for this reason.

Private mortgage insurance

Whether PMI premiums are deductible has changed back and forth over the years by legislation. Check the current-year rule rather than assuming.

The homestead exemption: do this first

Separate from the federal return, and more valuable for most buyers than any deduction: apply for the Texas homestead exemption with the county appraisal district. It reduces the taxable value of your home for school and other taxes and caps how fast the appraised value can rise. It is not automatic. The application is free, and the appraisal district's website has it. We wrote about it in The Texas Homestead Exemption: Check Yours Today.

Withholding adjustment

If you will now itemize where you did not before, your withholding may be too high. A W-4 adjustment moves that money into your paycheck during the year rather than into a refund next spring. If you will not itemize, nothing changes and no adjustment is needed.

Records to keep as long as you own the home

• The closing disclosure from the purchase
• Receipts for improvements — a new roof, an addition, a remodel — since they add to basis
• Each year's Form 1098 and property tax statements
• Records of any home office or rental use, which change the picture at sale

These make the eventual sale, covered in Selling a Home in Texas, a matter of pulling a folder rather than reconstructing a decade.

Where we come in

A home purchase is one of the life changes that makes the first year's return worth a conversation. Our individual tax preparation handles the itemize-or-not question with real numbers, and we work with homeowners across Weatherford, Willow Park, Aledo and the rest of Parker County. Get in touch before the first filing season in the new house.

What to keep from closing day

The closing disclosure is the single most useful document from the purchase, and it is the one most people lose. Keep it with your permanent records, not with this year's tax folder. It shows the purchase price, the prorated property tax you paid at closing, any points, and the closing costs that become part of your basis when you eventually sell. Years from now, when the question is how much gain you have on the sale, that document answers most of it.

Also keep the first mortgage statement of each year and the appraisal district notice, and file your homestead application as soon as you are eligible rather than waiting for a reminder that may never come. Buyers in Aledo, Hudson Oaks and across Parker County ask us about all of this at their first appointment after a purchase, and the ones who bring the closing packet leave with a complete answer.

This article is general information, not tax advice. Thresholds, forms and rules change from year to year, so confirm the details for your own situation before you file.

Bought a home this year? Call RD Precision Tax Service in Weatherford at (817) 480-6649, or request a free estimate. Robert has prepared returns for clients across Weatherford, Parker County and the surrounding North Texas counties since 2017.