Home Buying Tax Deductions

Do you know what is tax deductible when buying a house? Tax season is an excellent time to be a homeowner. Unlike renters, you get to take advantage of some tax benefits that are geared towards homeowners – tax breaks that can amount to thousands of dollars in savings, and sometimes even more.

One of the questions clients often ask is, what is tax-deductible from purchasing a home? Nobody wants to leave money on the table when it comes to taxes. The Federal Government gets enough of our hard-earned money as it is!

Considering how much money you may have spend on your home, or may still be spending, you deserve to get a break. But you can only take advantage of tax breaks if you know about them.

So, read on, and learn about the tax deductions that may benefit you and your finances from the home you bought last year. Homeownership tax deductions are plentiful if you know where to look!

Make sure when tax time comes around, you have everything detailed for your accountant to handle. Any good tax advisor will have a handle on all of these tax deductions that can be claimed after a home purchase or a home sale.

Here are the homeowner tax breaks you should be taking advantage of come tax time!

Mortgage Interest

Some tax breaks for homeowners are only mildly beneficial, but others – like mortgage interest deductions – can result in significant savings. Tax law says that you get to deduct up to a million dollars’ worth of mortgage interest. If you are like most homeowners, you are not going to come close to paying a million dollars in interest, so that means you get to deduct all of it.

The mortgage interest deduction is particularly beneficial in the first years of ownerhip, as most home loans make you pay back interest first.

You may wind up easily deducting $10,000 or more of interest in your first year. It all depends on how much your loan was for and how much interest you paid.

You may be wondering whether you can deduct mortgage interest if you hold a reverse mortgage. The IRS considers a reverse mortgage as a loan advance and not income.

So the money you receive isn’t taxable. Additionally, the interest that’s accrued on a reverse mortgage isn’t tax-deductible until the loan is paid off. With a reverse mortgage, you aren’t able to take a deduction for the interest each year like you would with a regular mortgage.

Property Taxes

Property taxes are another deduction that can be ideal for your finances, depending on what part of the country you live in. Years ago, all of your property taxes were deductible. Unfortunately, this is no longer the case. Deductions for property taxes took a significant hit in the last change to the tax code.

It used to be if you lived in an area where your property taxes are high, you could wind up deducting thousands of dollars.

Of course, if you live in an area where you have low property taxes, the benefits are much less noticeable. Whatever the circumstances, it is still worth your time to take the property tax deduction.   

You are able to still get a tax break for paying property taxes, but there is now a limit. You’re able to deduct up to ten thousand (five thousand if married and filing separately) of property taxes in combination with state and local income taxes.

Paying their fair share of real estate taxes is something people are sensitive to. While working as a real estate agent, one of the most common questions I am asked is how to challenge real estate tax assessments. Nobody wants to pay more real estate taxes than they should. Lots of folks think they are paying more in relation to their neighbors.

One thing many people do not realize is that second home real estate taxes are also deductible as well. So if your primary residence is up North and you decided to buy a getaway home down south in the warmer weather, you will be able to deduct the real estate taxes on that property too.

Home Sale Exemption

If you sold your home last year and made money off of the sale, the money you made – your capital gains – is free from taxation as long as you are below the threshold. As of now, a single person can make up to $250,000 from a home sale, while a married couple can make $500,000.

That tax-free profit can be used to upgrade to a better home, or for whatever you like. Keep in mind, the property must have been your primary residence to qualify. Real Estate capital gains tax deductions are one of the most significant breaks given to homeowners by the Federal Government.

If you have sold your home in the past year, it is a good idea to speak to a tax professional to have a clear understanding of your particular tax situation. The capital gains exception is a homebuyer tax deduction you won’t want to forget.

Private Mortgage Insurance (PMI)

Homebuyers who are not able to pay a full 20% down on a property are usually required to carry what’s known as private mortgage insurance. Private mortgage insurance is a type of insurance that protects the lender in the event a borrower defaults on the loan. For many homebuyers paying private mortgage insurance is a cost of doing business.

It is, however, possible to avoid paying PMI. Luckily, if you made less than $100,000 last year, you can deduct the money you paid for the PMI. How much benefit you get out of your deduction will depend on how much you spent for PMI, which can vary considerably.

(The PMI deduction was set to expire after the 2014 tax year but was extended for 2015, 2016, and 2017 tax years. You should be aware that the deduction for qualified mortgage insurance premiums is reduced if your adjusted gross income is over $100,000, and if it’s over $109,000, you can’t claim the deduction.)

Unfortunately, the PMI tax deduction has been taken away. You are no longer allowed to take a tax deduction for private mortgage insurance.

Borrowers should also be aware that it is possible to terminate paying private mortgage insurance once they have crossed the twenty percent equity threshold.

Legally lenders are supposed to automatically cancel PMI once you get to twenty-two percent equity in your home. It makes sound financial sense to stay on top of the market value of your property.

Residential Energy-Efficient Upgrades

There are tax benefits for homeowners who upgrade their homes with a focus on energy efficiency. There are a lot of different possibilities for energy-efficient upgrades, ranging from big ones like solar panels, wind turbines, and solar water heaters to less substantial updates, like ceiling fans that are energy efficient.

The right home renovations and upgrades – like solar panels – you can get up to a 30% credit. For others, like a ceiling fan, you may only get a $50 credit. There are also credits for roofs, insulation, water heaters, and more.

Check Energy.gov for information on energy efficiency tax credits. Use this resource to calculate the home tax deductions you are eligible for with your home improvements.

As a homeowner, make sure you understand that not every upgrade you add to your home equals a one for one value increase.

For example, I know lots of people who think adding solar power to their home will increase the market value by whatever the installation cost happens to be. Not true! In fact, in some areas of the country, there may be very little return. If you have to put solar panels on the front of your home and it is now unattractive, don’t expect a high return on investment either.

If you have installed energy-efficient upgrades, do your research and verify what credits you qualify for. You may be surprised to discover just how much of a break you get for your improvements.

Points

Another essential tax deduction to remember when buying a house is the points you paid on your mortgage.

Mortgage points are attractive to some buyers because they allow you to drive down your interest rate or to help with origination fees. Points make sense for some buyers, while not being worthwhile for others.

But if you were a buyer who bought points, you can take advantage of the tax break that comes with it. A point is equal to 1 percent of your loan amount or $1,000 for every hundred thousand borrowed. For example, if you are borrowing $200,000, a point would equal $2,000.

Generally speaking, it typically makes sense to pay points when you plan to be in the home for a while. By paying points, you are bringing the interest rate down on your loan.

If you only intend to stay in your home a few years, paying points does not make sense. An outstanding mortgage professional should be able to show you how long it will take to pay back the points. Nonetheless if you already paid points in the past year, they are a home tax deduction you will want to remember.

Home Improvement Loan Interest

There are particular loans for home improvements that allow you to get a tax break on the interest you pay, like a home equity loan or HELOC.

Much like mortgage interest, the tax benefits of this credit will be most significant for the first few years of the loan when most of your payments are going towards interest. Home improvement loan interest tax breaks can be sizable, sometimes in the thousands of dollars.

If you took out a home improvement loan when purchasing your house, make sure you check and see if you have a tax deduction coming your way!

Home Office Deduction

Your home office, if it is dedicated purely to work, could get you a tax break. The deduction is calculated based on the square footage of the office, at $5 a square foot.

The room needs to be used purely for work, though, because if you get audited, the IRS may decide the deduction is not valid if anything else is done in the room.

Home office tax deductions are not something you want to fool around with. If you are not sure about whether or not you qualify for a home tax deduction, speak to a tax professional.

Home tax deductions can get complicated. If you are the kind of person who just inputs your W-2 and gets your refund each tax season, dealing with the details of all the different tax deductions you are eligible for can be a little intimidating.

Various online tax programs can help guide you through filing with deductions, or you can always hire an accountant to assist you with your taxes. While it may cost more than a more simple tax return, the financial benefits that come from your home tax deductions will usually more than make up for the price of getting help.

Because filing as a homeowner is more complicated, be sure to allow yourself plenty of time to fill out your return and file before the deadline. Waiting until the last minute, especially if you have never done a more complicated return, is a recipe for stress and possible mistakes. Good luck, and be sure you take all the home buying tax deductions you are entitled to!