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Changes to tax deductions may take a lot of the pressure off buying or selling a home before the end of the year. Find out whether it might make sense for you.
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There are all kinds of pieces of accepted wisdom about homeownership that turn out to be more complicated in real life. For example, people say you can get a better deal if you buy a house at the end of the year. The thinking is that prices will be lower because of potential tax advantages, less competition, and sellers who really want to get the deal done.
In reality, there are many other factors to consider. For starters, there are also disadvantages to buying in December, such as fewer sellers and challenges with home inspections. Plus, wider economic issues (like what’s happening with mortgage rates) can have a bigger impact on the total cost of buying a home.
Let’s unpack two of the biggest reasons people say the end of the year might be a good time to buy and see if they stand up to closer scrutiny.
Reason 1: Home prices drop at the end of the year
If you’ve been battling to afford a house this year, the idea of even a slight dip in prices might make it worth keeping all the home-buying chores on your already packed holiday season to-do list.
It’s certainly true that house prices historically dip in December and January. Data from the National Association of Realtors shows a drop in both activity and home prices every winter. Even so, Fannie Mae’s latest survey into home buyer sentiment showed a record 85% of consumers think now is a bad time to buy a home.
The current mortgage rates really are a double whammy for potential buyers. Not only do high rates mean buyers have to contend with higher total costs and monthly payments, it also creates a tighter inventory since many sellers with low locked-in rates don’t want to move. Redfin’s latest data showed that median house prices are up 4% over last year.
The good news is that Redfin’s data also showed a drop in the average monthly mortgage payment. For the four weeks ending Nov. 26, it was at $2,575 — down from October’s all-time high of $2,739. But this isn’t because of a year-end drop in house prices. It’s because mortgage rates have fallen slightly. And interest rates are not seasonal.
What a difference a percent makes
Use a mortgage calculator to experiment with different figures and see the impact changes in prices and rates can have on your housing costs. If you look at the tables below, you’ll see that the total costs on a $360,000 home with an interest rate of 7.0% are almost the same as the costs of a $340,000 home at 8.0%.
$340,000 home ($80,000 down payment and 30-year fixed-rate mortgage)
$360,000 home ($80,000 down payment and 30-year fixed-rate mortgage)
If you’re trying to buy a home, the challenge is that we don’t know what will happen next year. Some experts predict that mortgage rates will fall. Even if they do, this could trigger a flux of buyer demand. If there isn’t a corresponding jump in potential sellers, this could result in even tighter inventory, pushing home prices up. Ultimately, there’s no right or wrong time to buy — a lot comes down to your needs and your finances.
Reason 2: There are tax benefits to buying a house at the end of the year
To be clear, there used to be decent tax benefits to buying or selling a house before the end of the year. But for many Americans, this is no longer the case. The way standard and itemized deductions work has changed, wiping out a lot of the potential savings.
The 2017 Tax Cuts and Jobs Act made itemizing — which is the only way to get the various homeowner tax benefits — a lot less attractive. The legislation significantly increased the standard deduction and capped the amount you could itemize on property taxes. As a result, many people stand to gain more by claiming the standard deduction. This, in turn, has reduced the pressure to do home deals in December.
Do itemized deductions make sense for recent home buyers?
If you’re wondering whether itemizing might make sense for you or what tax advantage you might gain by buying in this tax year, you need to do the math. The IRS allows homeowners to deduct certain state and local property taxes, mortgage interest, and mortgage points. You can also deduct other costs, such as medical expenses and charitable donations.
If you’re a first-time home buyer, the biggest potential win in terms of deductions will be any mortgage points you pay. If you buy in December, the seller will already have paid the majority of the year’s property taxes. You also won’t have a lot of mortgage interest to deduct.
Everything tax related comes with a bunch of caveats and addendums. But to give you a very simplified example, let’s say:
You buy a house before the end of the year and pay $6,000 in mortgage points to your mortgage lender.You pay $400 in taxes and another $1,800 in your first mortgage payment.You’ve also made $3,000 in charitable donations this year.You have $6,000 in deductible medical and dental bills.
This brings the total to $17,200. It is significantly less than the 2023 standard deduction of $27,700 for married couples filing jointly. That goes up to $29,200 in 2024. Put simply, many people will struggle to get enough itemized deductions to beat that figure, which reduces the pressure for a December property deal.
Bottom line
Don’t listen to generic advice that tells you to buy just because it is December. Not only do current market conditions have more impact than broad seasonal ones, what matters most is whether you are financially ready to buy a house. That means having a solid emergency fund, a good credit score, a dependable income, and enough money saved for a down payment.
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