The Tax Benefits of Homeownership

Taxes. The word just sounds menacing, right? We’re talking shivers down the spine. But for first-time homebuyers, it can also mean “refund.” How, you say?

Getting Started

If you want to take advantage of tax write-offs (also known as deductions), you’ll need to file a 1040 tax form, with a Schedule A, depending on your other tax situations for the year. A tax deduction is a reduction in income as a result of your expenses. Because it lowers your income, it may reduce the amount of tax you’re required to pay. That usually results in a refund.

Deductions, itemizations, and write-offs all mean the same thing — a reduction in income due to expenses — and are often used interchangeably.

If you aren’t well-versed on tax forms (like most of us), the 1040 asks you to complete supplemental information called “schedules.” There are schedules for self-employment, medical expenses, income gains and losses from investments, medical expenses, interest paid, and charitable donations. Each schedule is assigned a letter, and Schedule A covers deductions, such as property taxes and paid mortgage interest.

If this is your first time buying a house or filing taxes after the big purchase, you may want to seek the help of a professional to make sure you take advantage of all the home-related tax deductions and itemizations. And if you got married, had a baby, or relocated for work, additional deductions may be waiting for you.

Home-Related Itemization Perks

Mortgage Interest

Each month you make your payment, and part of that payment is your interest. All the interest you pay is tax deductible if your loan is less than $750,000 ($375,000 if married filing separately). For mortgages taken out before December 16, 2017, limits are higher. If you own multi-million-dollar properties, the IRS limits your interest deductions. Most homeowners can deduct mortgage interest, but only if they itemize their deductions on their federal income tax return by filing Schedule A with Form 1040 or a similar form. As a result, you must decide whether it is better to deduct mortgage interest by itemizing or taking the standard deductionA specific dollar amount that reduces the amount of income you must pay taxes on.standard deductionA specific dollar amount that reduces the amount of income you must pay taxes on..

If you refinanced or got a home equity line of credit (HELOC)A type of second mortgage that provides cash by borrowing against your equity.home equity line of credit (HELOC)A type of second mortgage that provides cash by borrowing against your equity., those debts may be partially deductible too.

If you bought a second home, that interest is also deductible. And investors who rent out a property for half of the year and live in the house the other half may be able to deduct that interest as well. If you don’t stay in the home for vacation purposes at least 10% of the number of days you rent it or at least 14 days a year, the IRS may not see it as a rental property and not allow you to deduct any of the interest.

Residential rental properties occupied by tenants all year do not count for tax write-offs.

Points

If you paid to have your interest rate reduced (meaning you likely had points on your Closing Disclosures), you can deduct those points, but it’ll be a little tricky.

If you purchased or built a new home, you can deduct the points in the year you paid them if the house is your primary residence and the amount you paid was deemed reasonable.

You’re also eligible to deduct points if you refinanced, but it’ll require you to do a little math. If you paid points during a refinance, they must be deducted over the life of the loan.

If you paid $3,000 in points for a 30-year mortgage, then you would have to calculate the monthly portion of those points. $3,000 divided by 360 months (a 30-year mortgage) yields a monthly portion of $8.33. Then, you must calculate the months you paid mortgage payments in the tax year. If you made 12 payments, you could deduct $99.96 in points. In each subsequent year, you'd subtract the same amount.

If you have a HELOC and use the line of credit to make home improvements, you can count the points in the year you bought them. However, if you used the home equity for something else, then you must apply the same logic as if you had refinanced and spread the deductions out over the term of your loan.

Lastly, if you purchased any other sort of home (second or vacation home), you must deduct those points over the life of the loan.

Property Taxes

No matter where you live, you'll be paying some property tax for your home. If your mortgage servicer has been paying your taxes for you, you've most likely been paying 1/12th of the total tax bill as part of your monthly mortgage payment into an escrow account. You may have paid some pro-rated taxes at closing too.

Is your head spinning? Don't stress! Your lender will send you a 1098 form with these items at the beginning of the year to make your tax filing a little smoother. The 1098 is an IRS tax form that specifically relates to your home. It breaks down your taxes, interest, and points paid.

Expert Tip

Is homeowner's insurance tax deductible? Sadly, the IRS does not consider any premiums paid for homeowners insurance as tax deductible.

How Do Mortgage Credit Certificates (MCC) Impact Taxes?

In some states, first-time homebuyers may be eligible for the Mortgage Credit Certificate (MCC), which helps make getting a mortgage more affordable. They’re not a tax deduction but a credit against federal income tax liability equal to a certain percentage of annual mortgage interest paid. They save you money now because the credit allows you to change your withholding information on your W-4, giving you access to more income now.

You can still claim the remaining interest on your federal income tax return. There are income and purchase amount requirements for the MCC, so talk to your Mortgage Banker about your eligibility.

Can I Get Energy Efficiency Credits?

You may be eligible for tax credits for improving your home with energy-efficient features and appliances. Many credits are only good for a short time. Check with the IRS to see which ones are expiring this year. Some may be extended.

Until now, you may have thought of the word "taxes" as a not-so-nice word, but now that you know that homeownership has tax perks, the only question remains: what will you do with your refund?

If you have any questions about homeownership and how you can take advantage of tax benefits, please don’t hesitate to reach out today!