Key Takeaways
- Owning a home can make the tax filing process more of a hassle, but certain benefits may make it worth the effort.
- If you purchased your first home between 2008 and 2010, you should verify whether you claimed your First-Time Homebuyer Credit.
- Homeowners, or those thinking about buying a home, should always consult a tax professional when seeking tax advice.
Wrapping one’s mind around how taxes and owning a home are interlaced is no easy feat. Not only are tax rules difficult to comprehend, changes made to the regulations at the whim of Congress can make it difficult to keep up. To make matters worse, a quick internet search on tax topics can yield misleading information. Read on to gain a better understanding of the implications homeownership can have in regards to taxes. More importantly, however, always consult a practicing tax professional to receive personalized guidance.
How Does Owning A Home Affect Your Taxes?
Owning a home will affect your taxes, which some may argue will be in a positive manner. You might be wary of the more complicated tax filing process associated with homeownership, but the potential savings can outweigh any perceived hassle. For those wondering “do you get a tax break for buying a house,” the answer is yes. When filing taxes, homeowners can make various deductions, such as for mortgage interest, points, private mortgage insurance and property taxes. The sections below provide an overview for each type of deduction.
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Mortgage Interest
One of the most highlighted tax benefits of buying a home is the mortgage interest deduction. Over the life of a loan, a homeowner will have to pay mortgage interest in addition to payments made towards the principal. Luckily, homeowners are able to deduct their mortgage interest, creating at least one tax break for buying a home. For mortgages acquired after December 16, 2017, the deduction limit is $750,000. Homeowners with loans originating before this date are able to claim up to $1 million. As a result, interest rates are some of the most important things to consider when buying a home.
Each January, taxpayers should receive Form 1098 from their mortgage lender. This form will state the mortgage interest that was paid in the previous year. However, homeowners should ensure that any interest paid between the closing date and the end of that specific month is included. Even if it is not listed on the form, this amount can still be deducted and can be found on the settlement sheet from the purchase of the property.
Points Deduction
A second tax break for buying a house is something that is commonly referred to as a ‘points deduction.’ Homebuyers oftentimes pay a certain number of “points” in order to obtain their mortgage. These points are paid directly to the lender at the time of closing, and is often to help lower the interest rate on the loan. These points are expressed as a percentage of the total loan amount. For example, one point is simply equal to one percentage point of the total loan. The good news here is that these points are included in tax deductions associated with homeownership. In order to qualify for the deduction, the loan must be secured by the home, and the amount of cash paid at the time of closing must be equal to the points. In addition, the number of points must be typical in that specific market. If the buyer had somehow convinced the seller to pay the points as part of the deal, the buyer can still deduct these points.
Private Mortgage Insurance (PMI) Deduction
A benefit of buying a house these days is that it has become very common for homebuyers to put down much less than 20 percent for a down payment. With the increasing availability of alternative financing solutions, such as the government-backed FHA Loan, some purchasers can even put down as little as 3.5 percent. This trend has helped to lower barriers to entry, making it easier for individuals to achieve a homeowner or investor lifestyle that they desire. However, when buyers put down less than 20 percent when acquiring property, they are typically required to pay private mortgage insurance (PMI). This comes in the form of extra fees that are usually added on to the monthly mortgage payment.
Those who purchased their home in or after 2007 are eligible to deduct private mortgage insurance premiums from their taxes. In order to make this deduction, a household must have an adjusted gross income lower than $100,000, or $50,000 for those who are married but filing separately.
Property Taxes
According to WalletHub.com, the average American household pays over $2,000 in property taxes annually. There are some states where the property tax rate is higher than others, such as New Jersey, Illinois and Texas. Although paying property taxes is no fun, one of the notable tax benefits of buying a house is the ability to deduct these taxes. The higher the property tax, the larger the deduction can be. It should be noted that the current cap on all local and state tax deductions is set at $10,000. Homeowners must claim property taxes in the year in which they actually made payments.
What Tax Breaks Do First Time Home Buyers Get?
The most prominent of tax breaks for new homeowners was the First-Time Homebuyer Credit program, which was a provision made under the Obama Administration in 2008. This program allowed individuals to receive a credit for up to $7.500 for the year in which they purchased their first homes. Although the tax expired on April 30, 2010, home owners are still eligible if they never claimed this credit before. In order to qualify, individuals must have closed on their first purchase on or before September 30, 2010 (but not before 2008.)
First time home buyers should note that they will also enjoy all the same tax benefits of all other homeowners. They should also check whether into tax rules at the state level, as some states offer tax benefit programs to first time buyers.
Summary
Owning a home provides individuals with a unique set of tax benefits and incentives that are hard to ignore. Discussed above, some of the tax benefits enjoyed by homeowners today include deductions and credits for mortgage interest, mortgage points, private mortgage insurance and property taxes. First time home buyers should also do their research on what tax benefits might be available to them, both on the state and national level.
Taxes and owning a home is not only a complicated subject, but is an intricate system of rules, benefits and exceptions that is ever-changing. Certain incentives that homeowners expect today can swiftly change with a new set of regulations tomorrow. When preparing to purchase a home or file your taxes, always be sure to consult a tax professional.
The relationship between taxes and owning a home can be easier to comprehend to those who are experienced. However, the intricacies of filing taxes as a first-time homeowner can be difficult to master. Do you have any advice to share? If so, feel free to share in the comments below.
