Did you know that buying a home can impact your tax savings? Discover the key tax benefits of homeownership in our guide. Read on!
There are many things that first-time homebuyers –– or even seasoned property owners –– might not know about homeownership. Despite the conventional wisdom, you don’t always have to put 20% down on a home. A less-than-stellar credit score doesn’t have to dash your dreams. And, as it turns out, there are actually quite a few tax benefits of buying a home.
But before you try to write off the entire purchase price of your brand-new home, it’s worth exploring a bit further to see what specific benefits you might be able to take advantage of this tax season. Below, we’ll unpack seven common home purchase tax deductions to help you offset your ownership costs and reduce your overall tax liability.
When it comes time to file your tax return, certain expenditures throughout the year can help reduce your taxable income, thus lowering the amount of tax you’ll end up owing. These are known as deductions. Common deductions include those for 401(k) or Roth IRA contributions. Still, taxpayers can also receive deductions for having (or adopting) a child, donating to charity, and even taking a loss at the roulette table.1 And if you buy or own a home, this property can also be an excellent source of potential deductions.
Home tax deductions are generally unlocked via the investments you make in your home. Interest paid, taxes, and some necessary home improvement projects can earn you valuable deductions, whether you opt for the standard deduction or choose to itemize your deductions (we’ll explain these in detail later.)
Deductions aren’t the only way you can catch a break at tax time. Whereas tax deductions reduce your taxable income, tax credits are applied directly to the amount you owe. For example: if you purchase an electric vehicle, you may be eligible for the EV tax credit. Rather than reducing your taxable income as would a deduction, this tax credit eliminates $7,500 directly from your tax bill.2 If your bill is low enough –– or if your credits are substantial enough –– your credits can result in a refund rather than just reducing your return.
As with tax deductions, there are a number of tax credits specifically for homeowners, like credits for energy-efficient home improvements. Improve your insulation, install solar panels, or update major appliances and you could receive sizable credits.3
How you leverage your tax deductions as a homeowner will depend on whether you use standard or itemized deductions –– and whether your filing status is single, married filing jointly, or head of household. The differences between these deduction types and filing statuses can be (understandably) confusing to some, so let’s explore them in greater detail before discussing the tax benefits of buying a home.
Your tax bracket depends on your marriage status, making it both financially and legally beneficial that you know your correct filing status. Single filers are unmarried taxpayers –– this includes divorcées –– and generally have lower income limits compared to married taxpayers. Married filed jointly refers to married taxpayers who have chosen to file alongside their spouse rather than filing an individual return, but surviving spouses can also file using this method. Lastly, the head of household is reserved for single taxpayers responsible for 50 percent or more of their household costs. These filers often benefit from a lower tax rate.4
At their core, these types of deductions share a fundamental similarity: they reduce your taxable income and, therefore, your tax liability. But their differences are significant –– and well worth considering. Notably, opting for standard deductions will be far easier, as itemizing requires you to carefully track your deductible spending throughout the year. With your receipts and bank statements, you’ll then compare your itemized deductions to the standard deduction for 2023, according to your filing status:
Should your itemized deduction exceed the standard deduction, you’re better off using this approach to file. If not, you can benefit from the simplicity of standard deductions.5
Understanding the differences between tax deductions and credits, and the nuances of filing statuses, we can begin exploring the seven tax benefits of buying a house.
For most homeowners, the most significant tax deduction will stem from interest paid on a mortgage –– but this benefit is often greatly enhanced for new homebuyers. The reasoning behind this is twofold. At the start of mortgage repayment, your loan balance is generally higher and therefore incurs more interest. Further, elevated mortgage rates mean recent home buyers will likely pay more in interest than those who bought at a lower rate.
This tax benefit is a deduction, helping to reduce your taxable income rather than directly reducing your tax bill. Depending on your filing status, you can deduct varying amounts of mortgage interest: all the way up to the first $750,000 of your mortgage debt, if you’re a single filer or a married couple filed jointly.6
There are a few common misconceptions about this tax benefit of owning a house. It’s important to note that you are not deducting your full mortgage payment. Rather, you’re deducting the portion of your payment that is solely interest. So, if your mortgage payment is $2,000/month and $500 of this is interest alone, your deduction is $500. Keep in mind that your tax rate will determine the ultimate value of this deduction.
Homebuyers can also see substantial tax benefits –– both deductions and credits –– after investing in home improvement projects. However, the scope of these tax-advantaged improvement projects can be quite limited. Primarily, these tax benefits are aimed at homeowners making “medically necessary” improvements. Undertakings like widening doorways, installing ramps or handrails, lowering cabinets, and other aging in place home modifications can benefit homeowners when tax season comes, allowing homeowners to deduct these costs.
Costs related to energy-efficient upgrades can also help. Installing solar panels, geothermal heat pumps, and fuel cells may qualify homeowners for a federal tax credit, striking a portion of your tax liability clean off your bill. If you’ve made any modifications to your home in the past year, consider whether these were medically necessary or environmentally friendly to see if you may be eligible for a tax break.7
As with your mortgage, interest paid on home equity loans or home equity lines of credit (HELOC) can also be deductible –– with some conditions. Per the IRS, the funds from a home equity loan or HELOC must be applied toward the purchase, construction, or substantial improvement of the home that secures the loan.
While this may seem limiting, there are countless ways to increase your home’s value while enjoying tax benefits. You can give your house a facelift via a fresh coat of paint, professional landscaping, or getting your driveway refinished. You can renovate your kitchen or bathroom, install new, energy-efficient appliances, or make these spaces more accessible. Or, you can add to your home’s usable space by building a garage, an additional bedroom, or even a new wing, depending on your available resources.
Another tax benefit of buying a house is the home office deduction: allowing you to deduct a portion of your mortgage and other costs if you use your home for business. This includes some of your utility bills, your homeowners insurance, home maintenance costs, and even household items like furniture and hand soap –– if they’re related to your business, that is. This benefit allows you to deduct up to 25 percent of your mortgage, or $5 for up to 300 square feet, using the simplified method.
But here’s where this deduction can get tricky. Homeowners are only allowed to deduct the percentage of the home used solely for business purposes. So, if you’re a business owner who works from the dining room table, you’re unable to deduct the full square footage of the dining room. However, if you have a section of the living room reserved solely for your desk, you may be able to deduct that specific area. You might find that the best way to cleanly take advantage of this tax benefit of buying a house is to designate a home office (ideally one that consumes exactly 25 percent of your usable square footage). But it’s wise to consult with a tax professional before you begin converting one of your extra bedrooms into an office.
See related: Is Homeowners Insurance Tax Deductible
Depending on where you live, property taxes can be a hefty fee –– as high as $10,000/year in some parts of the country –– but tax deductions can help offset this cost. Exactly how much of your property taxes you’re able to deduct will depend on your filing status. If you’re a single taxpayer, you can deduct up to $5,000 of your property tax. And for married couples filing jointly, this number jumps up to $10,000.8
Seeing as this is a deduction and not a credit, you can’t wipe up to $10,000 directly from your tax bill. But even at a tax rate of 29 percent, you can effectively eliminate $2,900, which will make a noticeable difference come April 15.
Mortgage insurance isn’t required for all homeowners, but it is required for homebuyers who choose to put down less than 20 percent toward their home purchase. This is to protect the lender, considering they’re taking on more exposure by issuing a loan with less collateral. Fortunately, in previous years, homeowners could deduct this mortgage insurance from their annual taxes. Whether the same will be true for 2023 remains uncertain, but you may still be able to claim this deduction if you’re filing your taxes for 2018, 2019, 2020, or 2021.9
Should this expired deduction become available once more, it will likely come with a crucial caveat: it’s only available should you choose to itemize your deductions rather than opting for the standard deduction. So, as you consider whether it’s worth it to itemize your deductions or accept the standard deduction, weigh the impact this decision will have on your mortgage insurance premium deduction.
Before we discuss the final way you can receive tax benefits from buying a house, we should first explain a bit of home-buying terminology: discount points. Mortgage points are not required to acquire a home, but they can be a great way to save money in the long run by paying a little extra on the front end. By purchasing a single discount point for 1 percent of the home’s total cost at the time of closing, homeowners can lower their interest rate by as much as .25 percent. While this might not seem like much, over the life of a 30-year loan, it can result in substantial savings.10 So, are mortgage points tax deductible?
These discount points lower your interest rate over the life of a loan, but they’re also tax-deductible over that 30-year span –– as long as you meet certain requirements. If you’re considering mortgage points, you may want to compare your potential tax savings to that of your mortgage interest deduction to be sure you’re maximizing your deductions and reaping all the tax benefits of buying a house.
Taxes are tricky; they’re influenced by countless variables and can, therefore, vary dramatically from person to person. So, while many of the above methods can help you reduce your tax bill, your best bet is to consult with a tax professional to unpack all the ways you can offset your ownership costs while using your home to your advantage.
Although we may not be tax experts, Truehold’s sale-leaseback can be every bit as advantageous when it comes to getting more out of your home. By selling your home to Truehold, you get access to your home equity without ever having to move –– without having to worry about things like property taxes or essential maintenance and repairs that may or may not play in your favor when filing your taxes.
To learn more about Truehold’s sale-leaseback, or for more resources tailor-made for homeowners, contact one of our advisors.
1. Nerdwallet. 20 Popular Tax Deductions and Tax Breaks for 2023–2024. https://www.nerdwallet.com/article/taxes/tax-deductions-tax-breaks
2. IRS. Credits for new clean vehicles purchased in 2023 or after. https://www.irs.gov/credits-deductions/credits-for-new-clean-vehicles-purchased-in-2023-or-after
3. IRS. Home energy tax credits. https://www.irs.gov/credits-deductions/credits-for-new-clean-vehicles-purchased-in-2023-or-after
4. Investopedia. Filing Status: What it Means on Your Taxes, Types. https://www.investopedia.com/terms/f/filingstatus.asp
5. TurboTax. Standard Deduction vs. Itemized Deductions: Which Is Better? https://turbotax.intuit.com/tax-tips/tax-deductions-and-credits/tax-deduction-wisdom-should-you-itemize/L8Ln7K0Gp
6. Nerdwallet. Mortgage Interest Tax Deduction: Definition, What Qualifies. https://www.nerdwallet.com/article/taxes/mortgage-interest-rate-deduction
7. The Balance. Are Home Improvements Tax-Deductible? https://www.thebalancemoney.com/are-home-improvements-tax-deductible-5116989
8. Forbes. How To Get The Top 3 Tax Deductions for 2023. https://www.forbes.com/sites/johnwasik/2023/01/06/how-to-get-the-top-3-tax-deductions-for-2023/?sh=7ef6e4a66719
9. Bankrate. Is private mortgage insurance (PMI) tax-deductible? https://www.bankrate.com/mortgages/deduct-private-mortgage-insurance/
10. Investopedia. The Ins and Outs of Mortgage Discount Points. https://www.investopedia.com/terms/d/discountpoints.asp
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