Buying a home is an important financial decision, and it’s important to take advantage of all the tax benefits available to you. As a homeowner, you may be eligible for various deductions and credits that can help reduce your overall tax liability. Understanding what you can write off when you buy a home is critical to maximizing your tax savings. In this article, we will explore five key areas where you may be able to find tax deductions or credits when buying a home.
1. Mortgage Interest
One of the most significant tax benefits of owning a home is the ability to deduct mortgage interest payments. If you obtain a mortgage to finance your home purchase, the interest portion of your monthly mortgage payment is generally tax deductible. This deduction can result in significant savings, especially in the early years of your mortgage when the interest portion is higher.
To qualify for this deduction, you must itemize your deductions on your tax return. In addition, there are certain limitations on the amount of mortgage interest you can deduct. Beginning in tax year 2021, you can deduct interest on mortgage debt up to $750,000 if you’re married filing jointly or $375,000 if you’re single or married filing separately.
It’s important to note that the Tax Cuts and Jobs Act of 2017 made significant changes to the mortgage interest deduction. If you bought your home after December 15, 2017, the new limits apply. If you purchased your home before that date, you may still be eligible for the previous, higher limits.
2. Property Taxes
Another expense you can often deduct when you buy a home is property taxes. Property taxes are annual taxes levied by state and local governments based on the assessed value of your property. These taxes are usually deductible as an itemized deduction on your federal tax return.
To claim this deduction, you’ll need to determine the total amount of property taxes you paid during the tax year. This information can usually be found on your annual property tax statement. It’s worth noting that the deduction for state and local taxes, including property taxes, is subject to a $10,000 cap ($5,000 if married filing separately) starting in tax year 2018.
Keep in mind that property tax rates can vary depending on where you live, so it’s important to check with your local tax office or a tax professional to ensure you’re calculating your property tax deduction accurately.
3. Points and origination fees
When you bought a home, you may have paid points or origination fees to your mortgage lender. Points are prepaid interest charges, and each point is equal to 1% of your loan amount. Origination fees, on the other hand, are fees charged by the lender for processing your loan application.
In many cases, points and origination fees paid at closing may be tax deductible. The IRS considers these payments to be prepaid interest, and you can generally deduct them over the life of your mortgage. However, there are certain criteria you must meet to qualify for this deduction, such as using the loan to buy or build your primary residence and the points must not exceed the standard range for similar loans in your area.
It’s important to review your loan documents and consult with a tax professional to determine if you’re eligible for deductions related to points and origination fees.
4. Mortgage insurance premiums
If your down payment is less than 20% of the purchase price of the home, your lender may require you to pay for mortgage insurance. Mortgage insurance protects the lender in case you default on your loan. The good news is that you may be able to deduct your mortgage insurance premiums as a qualified residence interest deduction.
It’s worth noting, however, that the ability to deduct mortgage insurance premiums is subject to income limitations. The deduction begins to phase out for taxpayers with adjusted gross income (AGI) over $100,000 ($50,000 if married filing separately) and is completely phased out for taxpayers with AGI over $109,000 ($54,500 if married filing separately).
Be sure to consult a tax professional to determine if you meet the income requirements and if you’re eligible for this deduction.
5. Home office expenses
If you use a portion of your home exclusively for business purposes, you may be able to deduct home office expenses. To qualify for this deduction, you must regularly and exclusively use the space as your principal place of business or where you meet with clients or customers.
The home office deduction can provide significant tax savings by allowing you to deduct a portion of your home-related expenses, such as utilities, insurance, and repairs. The amount you can deduct is based on the percentage of your home that is used for business purposes.
It’s important to keep accurate records and documentation of your home office expenses to support your deduction. In addition, the IRS has specific guidelines and requirements for claiming this deduction, so it’s a good idea to consult with a tax professional to make sure you’re in compliance.
Buying a home comes with several financial considerations, and taking advantage of available tax deductions and credits can have a significant impact on your overall financial picture. By understanding what you can write off when buying a home, you can maximize your tax savings and potentially reduce your tax liability.
In this article, we have discussed five key areas where you may be able to find tax deductions or credits when buying a home. These include mortgage interest, property taxes, points and origination fees, mortgage insurance premiums, and home office expenses. However, it’s important to note that tax laws can change and individual circumstances may vary, so it’s always a good idea to consult a qualified tax professional for personalized advice.
Remember, understanding the tax benefits of homeownership can help you make sound financial decisions and get the most out of your investment in a new home.
What can I write off when I buy a house?
When you buy a house, there are several expenses that you may be able to write off on your taxes. Here are some common deductions:
Can I deduct mortgage interest?
Yes, you can generally deduct the mortgage interest you pay on your primary residence and, in some cases, on a second home. The deduction is subject to certain limits, so it’s important to consult with a tax professional or refer to the IRS guidelines for specifics.
Are property taxes deductible?
Yes, you can deduct property taxes paid on your primary residence and second homes. The deduction is subject to certain limitations and may be capped, so it’s advisable to review the IRS guidelines or seek professional advice.
Can I deduct points paid on my mortgage?
Yes, you may be able to deduct points paid on your mortgage. Points are prepaid interest that you pay at closing to lower your interest rate. The deductibility of points depends on various factors, such as whether the loan is for your primary residence and if the points were within the normal range for your area. Consult with a tax professional for guidance on your specific situation.
What about mortgage insurance premiums?
Prior to 2021, you could deduct mortgage insurance premiums, but this provision has expired and is no longer available for most taxpayers. However, it’s worth checking for any recent updates or changes in tax laws that may reinstate this deduction.
Are there any other deductible expenses related to homeownership?
Yes, there may be other deductible expenses associated with homeownership. Some examples include certain home office expenses, energy-efficient home improvements, and home equity loan interest, subject to specific rules and limitations. It’s advisable to consult with a tax professional to determine which expenses you can deduct based on your individual circumstances.