Thinking of buying a home? There are plenty of perks if you purchase one. You can decorate it to suit your taste; you can install a professional home theater system, or you can perfectly customize the walk-in closet to hold everything you have, just the way you want it. But there are other benefits—the financial kind.
If you rented in the past, all of your money went to a landlord, and none of it came back to you as a tax deduction. That changes if you’re a homeowner.
Whether you buy a mobile home, townhouse, condominium, co-operative apartment, or single-family home, several tax breaks can save you money at tax time.
The only downside is that your taxes will get more complicated. Gone are the days when you plug your W-2 information into the 1040EZ form and finish your taxes 10 minutes later. As a homeowner, you enter the wonderful world of itemizing. Of course, it’s worth the hassle when you see how much money you might save.
Key Takeaways
- Buying a home may be the most expensive and important purchase you make in your life.
- The Internal Revenue Service (IRS) provides several tax breaks to make homeownership more affordable.
- Common tax deductions include those for mortgage interest, mortgage points, and private mortgage insurance (PMI).
- To claim the deductions, you have to itemize your taxes (and not take the standard deduction).
- Tax credits are available for qualified first-time homebuyers and homeowners who invest in energy improvements (e.g., solar panels and energy-efficient windows).
Tax Credits vs. Tax Deductions
In the tax world, there are deductions, and there are credits. Credits represent money taken off of your tax bill. Think of them ascoupons. If you get a $1,000 tax credit, your tax due will decrease by $1,000. A tax deduction reduces your adjusted gross income (AGI), which in turn reduces your tax liability.
For example, if you’re in the 24% tax bracket, your tax liability will be reduced by 24% of the total claimed deduction. So, if you claim a $1,000 deduction, you can expect your tax liability to drop by $240 ($1,000 × 24%).
Tax Deductions for Homeowners
Most of the favorable tax treatment that comes from owning a home is in the form of deductions. Here are the most common deductions:
Mortgage Interest Deduction
You can deduct your home mortgage interest on the first $750,000 ($375,000 if married filing separately) of mortgage debt. The old limit—$1 million ($500,000 if married filing separately)—applies if you bought your home before Dec. 16, 2017.
You can’t deduct home mortgage interest unless you itemize deductions on Schedule A Form 1040 or 1040-SR, and the mortgage is a secured debt on a home in which you have an ownership interest. You can deduct mortgage interest on a second home as long as the mortgage satisfies the same requirements for deductible interest as on your primary residence.
In January, after the end of the tax year, your lender will send you Internal Revenue Service (IRS) Form 1098, detailing the amount of interest that you paid in the previous year. Be sure to include any interest that you paid as part of your closing. Lenders will include interest for the partial first month of your mortgage as part of your closing.You can find it on the settlement sheet. Ask your lender or mortgage broker to point this out to you. If it’s not included on your 1098, add this to your total mortgage interest when doingyour taxes.
Mortgage Points Deduction
You may have paid mortgage points to your lender as part of a new loan or refinancing. Each point that you buy generally costs 1% of the total loan and lowers your interest rate by 0.25%. For example, if you paid $300,000 for your home, each point would equal $3,000 ($300,000 × 1%). And, with a 4% interest rate, for instance, that one point would lower the rate to 3.75% for the life of the loan. As long as you actually gave the lender money for these discount points, you get a deduction.
Like the mortgage interest deduction, discount points are deductible on the first $750,000 of debt.
If you refinanced your loan or took out a home equity line of credit (HELOC), you receive a deduction for points over the life of the loan. Each time you make a mortgage payment, a small percentage of the points is built into the loan. You can deduct that amount for each month that you made payments. So, if $5 of the payment was for points, and you made a year’s worth of payments, your deductible amount would be $60.
Your lender will send you Form 1098, detailing how much you paid in mortgage interest and mortgage points. Using that information, you can claim the deduction on Schedule A of Form 1040 or 1040-SR.
Private Mortgage Insurance (PMI)
Lenders charge private mortgage insurance (PMI) to borrowers who put down less than 20% on a conventional loan. PMI usually costs $30 to $70 a month for each $100,000 borrowed. Like other types of mortgage insurance, PMI protects the lender (not you) if you stop making mortgage payments. Depending on your income and when you bought your home, you might be able to deduct your PMI payments.
Mortgage insurance premiums can now no longer be deducted.
Prior to 2022, the PMI deduction expired and was renewed several times. The PMI deduction expired in 2017 but was renewed in 2019 and retroactively applied to the 2018 tax year. The deduction was available for 2020 and extended through 2021 under the Consolidated Appropriations Act (CAA) of 2021. For 2022 returns, the IRS has let the deduction expire, and taxpayers can currently no longer deduct mortgage insurance premiums.
State and Local Tax (SALT) Deduction
The state and local tax (SALT) deduction lets you deduct certain taxes paid to state and local governments, provided that you itemize on your federal return. The $10,000 cap applies whether you are single or married filing jointly and drops to $5,000 if you’re married filing separately. The deduction limit relates to the combined total deduction of state income, local income, sales, and property taxes.
You must itemize your deductions to claim the mortgage interest deduction, mortgage points deduction, and SALT deduction. You can’t claim these deductions if you take the standard deduction when filing your tax return.
If you payyour property taxes through a lender escrow account, you’ll find the amount on your 1098 form. Alternatively, you will have personal records in the form of a check or automatic transfer if you pay directly to your municipality. Be sure to include payments that you made to the seller for any prepaid real estate taxes (you can find themon your settlement sheet).
State and local income taxes withheld from your paycheck appear on your W-2 form, which your employer(s) should send by the end of January following the tax year. If you elect to deduct state and local sales taxes instead of income taxes (you can’t deduct both), you can use your actual expenses or the optional sales tax tables found in Schedule A (Form 1040).
Home Sale Exclusion
Chances are you won’t have to pay taxes on most of the profit that you might make when you sell your home, thanks to the home sale exclusion.
If you’ve owned and lived in the home for at least two of the five years before the sale, you won’t pay taxes on the first $250,000 of profit (i.e., capital gain). The number doubles to $500,000 if you’re married filing jointly. However, at least one spouse must meet the ownership requirement, and both spouses must meet the residency requirement (i.e., lived in the home for two out of the previous five years). You might be able to meet part of the residency requirement if you had to sell your home early due to a divorce, job change, or something else.
If you have a taxable gain on the sale of your main home that’s greater than the exclusion, report the entire gain on Form 8949: Sales and Other Dispositions of Capital Assets.
Depending on how long you owned the home, any gains will be taxed at either the short-term or long-term capital gains rate:
- Short-term capital gains tax rates apply if you owned the home for less than a year. These gains are taxed at your ordinary income tax rate, which is 10% to 37% for 2022 and 2023.
- Long-term capital gains tax rates apply if you owned the home for more than a year. The rate is 0%, 15%, or 20%, depending on your filing status and income.
Tax Credits
You might be eligible for a mortgage credit if you were issued a qualified mortgage credit certificate (MCC) by a state or local governmental unit or agency under a qualified mortgage credit certificate program. Also, check energy.gov to find out whether your state offers tax credits, rebates, and other incentives for energy-efficient improvements to your home.
Which Expenses Can I Itemize?
You itemize your deductions on Schedule A Form 1040. Homeowners cangenerally deduct home mortgage interest, home equity loan or home equity line of credit (HELOC) interest, mortgage points, private mortgage insurance (PMI), and state and local tax (SALT) deductions. You also may be able to deduct charitable donations, casualty and theft losses, some gambling losses, unreimbursed medical and dental expenses, and long-term care premiums.
Who Should Itemize Deductions?
You can either take the standard deduction or itemize your deductions. If the value of expenses that you can itemize is greater than the standard deduction, then it makes financial sense to itemize. Also, you must itemize to claim the mortgage interest, mortgage points, and SALT deductions.
What Are the Standard Deduction Amounts for 2022?
For tax year 2022, the standard deduction is $12,950 for single and married filing separately taxpayers, $19,400 for heads of household, and $25,900 for married filing jointly filers and surviving spouses.
What Are the Standard Deduction Amounts for 2023?
For tax year 2023, the standard deduction is $13,850 for single of married filing separately taxpayers, $20,800 for heads of household, and $27,700 for married filing jointly filers.
The Bottom Line
Let’s keep this in perspective: If you’re in the 24% tax bracket, you’re still paying nearly 75% of your mortgage interest without any deductions. Don’t fall into the trap of thinking that paying interest is beneficial because it reduces your taxes. Paying off your home as quickly as possible is, by far, the best financial move. There’s no prepayment penalty for paying off your mortgage, so pay as much as you can if you plan to live in the home for a long time. Of course, talk to your financial planner about the most beneficial way to pay down your debt.
FAQs
Homeowners can generally deduct home mortgage interest, home equity loan or home equity line of credit (HELOC) interest, mortgage points, private mortgage insurance (PMI), and state and local tax (SALT) deductions.
What tax deductions can I claim for buying a house? ›
Homeowners can generally deduct home mortgage interest, home equity loan or home equity line of credit (HELOC) interest, mortgage points, private mortgage insurance (PMI), and state and local tax (SALT) deductions.
Why is buying a house good for taxes? ›
Mortgage interest is tax-deductible, and the advanced interest payment may be tax-deductible as well. If you recently refinanced your loan or received a home equity line of credit, you may also receive tax-deductible points over the life of that loan.
Will buying a home reduce my taxes? ›
As a newly minted homeowner, you may be wondering if there's a tax deduction for buying a house. Unfortunately, most of the expenses you paid when buying your home are not deductible in the year of purchase. The only tax deductions on a home purchase you may qualify for is the prepaid mortgage interest (points).
What is one of the most important tax benefits of income property ownership? ›
Main tax benefits of owning rental property include deducting operating and owner expenses, depreciation, capital gains tax deferral, and avoiding FICA tax. In most cases, income from a rental property is treated as ordinary income and taxed based on an investor's federal income tax bracket.
How much money do you get back on taxes for mortgage interest? ›
As noted, in general, you can deduct the mortgage interest you paid during the tax year on the first $750,000 ($375,000 if married filing separately) of your mortgage debt for your primary home or a second home.
What is an advantage of homeownership? ›
Homeownership offers tremendous freedom to create the living environment that you have always wanted. You can own pets, paint rooms whatever color you like, make changes to the floors and carpeting and do all the things that make a house feel like your home – all without having to get approval from a landlord.
Can you write off home improvements? ›
Home improvements and taxes
When you make a home improvement, such as installing central air conditioning or replacing the roof, you can't deduct the cost in the year you spend the money. But, if you keep track of those expenses, they may help you reduce your taxes in the year you sell your house.
How can I reduce my taxable income? ›
How Can I Reduce My Taxable Income? There are a few methods that you can use to reduce your taxable income. These include contributing to an employee contribution plan, such as a 401(k), contributing to a health savings account (HSA) or a flexible spending account (FSA), and contributing to a traditional IRA.
Why is my tax return so low after buying a house? ›
Buying a home is not a guarantee of a big refund. Your deductions for homeownership combined with your other deductions (if any) must exceed your standard deduction to change your tax due or refund. If you purchased your home late in the year, you do not even have a full year of home ownership deductions.
The Bottom Line. Obtaining a mortgage will affect your credit score, and while it might dip slightly at first, your credit score can improve by making consistent, timely mortgage payments every month. Once your credit score is on the rise, you'll likely see better terms and interest rates for future loans you take on.
What will the standard deduction be for 2023? ›
Standard Deduction Amounts for 2023 Taxes (Returns Due April 2024)
| Filing Status | Standard Deduction 2023 |
|---|
| Single; Married Filing Separately | $13,850 |
| Married Filing Jointly & Surviving Spouses | $27,700 |
| Head of Household | $20,800 |
Apr 20, 2023
Here are seven benefits of owning a home:
More stable housing costs. An appreciating investment. Opportunity to build equity. A source of ready cash.
Is real estate a tax write off? ›
Use Real Estate Tax Write-Offs
One of the biggest financial perks of this income stream is the real estate investment tax deductions you're able to take. You get to deduct expenses directly tied to the operation, management and maintenance of the property, such as: Property taxes.
Do you get a bigger tax return if you have a mortgage? ›
If you have a mortgage on your home, you can take advantage of the mortgage interest deduction. You can lower your taxable income through this itemized deduction of mortgage interest. In the past, homeowners could deduct up to $1 million in mortgage interest.
Is the mortgage interest 100% tax deductible? ›
Taxpayers can deduct the interest paid on first and second mortgages up to $1,000,000 in mortgage debt (the limit is $500,000 if married and filing separately). Any interest paid on first or second mortgages over this amount is not tax deductible.
Can you write off your mortgage? ›
Many U.S. homeowners can deduct what they paid in mortgage interest when they file their taxes each year. (The rule is that you can deduct a home mortgage's interest on the first $750,000 of debt, or $375,000 if you're married and filing separately.) You'll need to itemize your deductions on Schedule A (Form 1040).
Can I claim my dog on my taxes? ›
You may claim income your pet earns on your taxes, and you can also receive tax deductions for care of working animals, including: Guard animals. Search animals. Livestock.
Can you write off gas on taxes? ›
If you're claiming actual expenses, things like gas, oil, repairs, insurance, registration fees, lease payments, depreciation, bridge and tunnel tolls, and parking can all be deducted."
What tax deductions are no longer allowed? ›
Eliminated deductions include moving expenses and alimony, while limits were placed on deductions for mortgage interest and state and local taxes. Key expenses no longer deductible include those related to investing, tax preparation, and hobbies.
Top 5 Advantages of Homeownership
- 1) Financial stability. In terms of both lifestyle and monetary stability, buying a home provides a new sense of reliability to first-time homeowners. ...
- 2) Financial strength. ...
- 3) Tax benefits. ...
- 4) Permanent residence. ...
- 5) Sense of community.
The benefits of investing in a home include appreciation, home equity, tax deductions, and deductible expenses.
What are 3 advantages and 3 disadvantages of buying a home? ›
Homeownership Pros and Cons At A Glance
| Pros | Cons |
|---|
| Tax deductions | Upfront costs |
| Can help increase your credit score | Property taxes and other recurring fees |
| Privacy and control over own space | Responsible for the work and cost of home repairs |
| Feeling of accomplishment | Less flexibility to move |
1 more rowMay 22, 2023
Unfortunately, you are going to find that the answer to the question, “Is roof replacement tax deductible?”, will usually be “No.” You will not be able to claim a tax deduction on a new roof in most instances.
Is painting your house tax deductible? ›
Only expenses anticipated to have a favorable financial impact in the future can be capitalized. Painting houses do not count as capital improvements. Therefore, property owners cannot deduct the expense of painting from their taxes.
Is a new HVAC system tax deductible 2023? ›
Known as the Energy Efficient Home Improvement Tax Credit, this program allows you to earn a tax credit of up to $3,200 a year. The program started on January 1, 2023, and will run until December 31, 2032, which means you may be eligible if you upgrade or replace any HVAC unit within the next decade.
Is it better to claim 1 or 0 on your taxes? ›
By placing a “0” on line 5, you are indicating that you want the most amount of tax taken out of your pay each pay period. If you wish to claim 1 for yourself instead, then less tax is taken out of your pay each pay period.
How can I lower my taxable income 2023? ›
9 Ways to Reduce Your Taxable Income
- Contribute to a 401(k) or Traditional IRA.
- Enroll in Your Employee Stock Purchasing Program.
- Deduct Business Expenses.
- If You Can, Invest in Qualified Opportunity Funds.
- Donate Stocks Through Donor-Advised Funds.
- Sell Poor-Performing Stocks.
- Deduct Student Loan Interest.
The 2023 tax year—the return you'll file in 2024—will have the same seven federal income tax brackets as the 2022-2023 season: 10%, 12%, 22%, 24%, 32%, 35% and 37%. Your filing status and taxable income, including wages, will determine the bracket you're in.
What state has the highest property taxes? ›
1. New Jersey. New Jersey earns the top spot as highest property taxes not only in property tax rate, which is over the 2% mark, but in the actual dollars spent in property taxes; here the average home value is the highest on the list.
6 Ways to Get a Bigger Tax Refund
- Try itemizing your deductions.
- Double check your filing status.
- Make a retirement contribution.
- Claim tax credits.
- Contribute to your health savings account.
- Work with a tax professional.
All of the data below comes from the Census Bureau's 2021 1-year American Community Survey (ACS) Estimates. Hawaii has the lowest property tax rate in the U.S. at 0.27%. The Aloha state has a home median value of $722,500.
How much does owning a home increase your credit score? ›
Buying a home does not improve your credit score. The acts of buying and owning a home do not affect your credit score because your personal assets are not factored into credit score calculations. If you take out a mortgage to buy your home, that can impact your credit score.
What is the highest credit score? ›
The base FICO® Scores range from 300 to 850, and a good credit score is between 670 and 739 within that range.
What is the average credit score? ›
The average credit score in the United States is 698, based on VantageScore® data from February 2021. It's a myth that you only have one credit score. In fact, you have many credit scores. It's a good idea to check your credit scores regularly.
How do I get a $10000 tax refund 2023? ›
How to Get the Biggest Tax Refund in 2023
- Select the right filing status.
- Don't overlook dependent care expenses.
- Itemize deductions when possible.
- Contribute to a traditional IRA.
- Max out contributions to a health savings account.
- Claim a credit for energy-efficient home improvements.
- Consult with a new accountant.
NOTE: The 7.65% tax rate is the combined rate for Social Security and Medicare. The Social Security portion (OASDI) is 6.20% on earnings up to the applicable taxable maximum amount (see below). The Medicare portion (HI) is 1.45% on all earnings.
What is the 2023 elderly deduction? ›
The IRS considers an individual to be 65 on the day before their 65th birthday. The standard deduction for those over age 65 in 2023 (filing tax year 2022) is $14,700 for singles, $27,300 for married filing jointly if only one partner is over 65 (or $28,700 if both are), and $21,150 for head of household.
What is the best reason to buy a house? ›
Key Takeaways. Buying a home is a big decision, but there are many reasons why you should consider it. The pride of ownership, home value appreciation, mortgage interest deductions, and potential property tax deductions are a few of the best reasons.
What are disadvantages of buying a home? ›
Disadvantages of owning a home
- Costs for home maintenance and repairs can impact savings quickly.
- Moving into a home can be costly.
- A longer commitment will be required vs. ...
- Mortgage payments can be higher than rental payments.
- Property taxes will cost you extra — over and above the expense of your mortgage.
Homeownership Keeps Housing Costs Stable
Although property taxes and homeowners insurance rates tend to increase over time, for most homeowners, principal and interest make up the majority of their total mortgage payment. Renting, on the other hand, can leave you vulnerable to increases in housing costs.
What is the most property tax you can deduct? ›
If you itemize your deductions, you can deduct the property taxes you pay on your main residence and any other real estate you own. The total amount of deductible state and local income taxes, including property taxes, is limited to $10,000 per year.
What is a tax write off when buying a house? ›
Homeowners can generally deduct home mortgage interest, home equity loan or home equity line of credit (HELOC) interest, mortgage points, private mortgage insurance (PMI), and state and local tax (SALT) deductions.
How does the IRS know if I have rental income? ›
Ways the IRS can find out about rental income include routing tax audits, real estate paperwork and public records, and information from a whistleblower. Investors who don't report rental income may be subject to accuracy-related penalties, civil fraud penalties, and possible criminal charges.
What is the #1 goal of taxes? ›
The obvious answer is that taxes are needed to raise revenue for necessary governmental functions, such as the provision of public goods.
Who benefits the most from taxes? ›
Lower Income Households Receive More Benefits as a Share of Total Income. Overall, higher-income households enjoy greater benefits, in dollar terms, from the major income and payroll tax expenditures.
Who pays the most in taxes and why? ›
The highest-earning Americans pay the most in combined federal, state and local taxes, the Tax Foundation noted. As a group, the top quintile — those earning $130,001 or more annually — paid $3.23 trillion in taxes, compared with $142 billion for the bottom quintile, or those earning less than $25,000.
Are moving expenses tax deductible? ›
You can deduct the expenses of moving your household goods and personal effects, including expenses for hauling a trailer, packing, crating, in-transit storage, and insurance. You can't deduct expenses for moving furniture or other goods you bought on the way from your old home to your new home.
Do you have to report sale of home on tax return? ›
Reporting the Sale
Report the sale or exchange of your main home on Form 8949, Sale and Other Dispositions of Capital Assets, if: You have a gain and do not qualify to exclude all of it, You have a gain and choose not to exclude it, or. You received a Form 1099-S.
Can you deduct mortgage interest if you take the standard deduction? ›
The mortgage interest deduction is only available to those who itemize their deductions. If you take the standard deduction, you won't be able to deduct your mortgage interest.
One of the most common reasons you don't yet see your mortgage on your credit report is because there's been a simple reporting delay. For most people, it can take anywhere from 30 to 90 days for a new or refinanced loan to appear.
Does closing a mortgage affect credit score? ›
Once you close on your mortgage, you could see another drop in your credit score since you've officially taken on new, additional debt. However, your score will likely increase over time as you start making timely payments.
What moving expenses are not deductible? ›
Nondeductible moving expenses
Costs of settling into your new home, including car tags, dog licenses, driver's license, or club fees. Security deposits lost at the old home. The cost of breaking a lease at the old home. Costs of selling the old home or buying a new one, including closing costs, mortgage fees, and ...
What moving expenses are tax deductible 2023? ›
Tax deductions for moving expenses
For most taxpayers, moving expenses are no longer deductible, meaning you can no longer claim this deduction on your federal return. This change is set to stay in place for tax years 2018-2025.
What is the one time capital gains exemption? ›
Key Takeaways. You can sell your primary residence and be exempt from capital gains taxes on the first $250,000 if you are single and $500,000 if married filing jointly.
What is the 2 out of 5 year rule? ›
The 2-out-of-five-year rule states that you must have both owned and lived in your home for a minimum of two out of the last five years before the date of sale. However, these two years don't have to be consecutive, and you don't have to live there on the date of the sale.
How long do I have to buy another house to avoid capital gains? ›
How Long Do I Have to Buy Another House to Avoid Capital Gains? You might be able to defer capital gains by buying another home. As long as you sell your first investment property and apply your profits to the purchase of a new investment property within 180 days, you can defer taxes.
Should I itemize if I bought a house? ›
If you own a home and the total of your mortgage interest, points, mortgage insurance premiums, and real estate taxes are greater than the standard deduction, you might benefit from itemizing.
Is it better to itemize or standard deduction? ›
The question is which method saves you more money. Here's what it boils down to: If your standard deduction is less than your itemized deductions, you probably should itemize. If your standard deduction is more than your itemized deductions, it might be worth it to take the standard deduction and save some time.
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