Does the IRS Know When You Buy a House?
While there's no direct alert, the IRS learns of your home purchase through various financial reporting, establishing a baseline for future tax events.
The Internal Revenue Service (IRS) does not receive a direct, real-time alert when you purchase a house. However, the financial ecosystem surrounding a home purchase is filled with reporting requirements. These events create a data trail that, over time, makes the IRS aware of your homeownership. The process is less about an immediate notification and more about a gradual accumulation of information through official channels.
Information Reported at Closing
A primary document generated by the transaction is Form 1099-S, Proceeds From Real Estate Transactions. This form is typically filed by the person responsible for closing the transaction, such as the settlement agent or attorney. It reports the gross proceeds from the sale to the IRS and is primarily intended to track the seller’s potential capital gains. Although the form’s focus is on the seller, it officially documents the transaction’s existence, value, and date in an IRS database.
A more direct reporting requirement occurs if a large amount of cash is used. If you bring more than $10,000 in cash or certain cash equivalents to the closing, the recipient must file Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business. This form must be filed with the IRS within 15 days of the transaction. “Cash” includes currency, coins, cashier’s checks, money orders, bank drafts, and traveler’s checks with a face value of $10,000 or less.
Tax Deductions That Alert the IRS
Claiming homeownership-related deductions on your annual tax return provides direct evidence of your new status. The most common way this occurs is through the mortgage interest deduction.
Your mortgage lender is required to send both you and the IRS a Form 1098, Mortgage Interest Statement, if you paid $600 or more in mortgage interest during the year. This form details the total amount of interest you paid, along with any mortgage insurance premiums or points you may have paid at closing.
When you itemize deductions and claim the mortgage interest reported on Form 1098, the IRS’s systems can match the amount you claim with the information provided by your lender. Claiming deductions for state and local taxes (SALT), which includes property taxes paid on your home, further solidifies the evidence of homeownership on your tax return.
The IRS’s Primary Interest The Eventual Sale
The IRS’s interest in your home purchase is less about the immediate transaction and more about establishing a baseline for the future. The purchase price of your home sets its “cost basis,” which is the original value of the property for tax purposes. This basis also includes certain settlement fees and closing costs. Keeping the final closing disclosure statement is important, as it documents many of these costs that add to your basis.
This cost basis is the starting point for calculating your capital gain or loss when you eventually sell the property. The formula is the sale price minus the adjusted basis. Over the years, the basis can be adjusted; it increases with the cost of capital improvements like adding a deck or a new roof, and it can decrease due to certain tax credits or casualty losses. The home sale exclusion, which may allow a single filer to exclude up to $250,000 of gain and married couples up to $500,000, makes an accurate basis calculation particularly important.