8 Tax Benefits of Buying a Home [Explained]

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Are you considering buying a home? If so, you may be wondering what the tax benefits are.

In this article, we will discuss:

  • the tax benefits of buying a home
  • whether buying a home affects your tax returns
  • whether the tax benefits are worth it

If you are thinking about purchasing a property in the near future, make sure to read this article to maximize your tax benefits!

What Are the Tax Benefits of Buying a Home?

Homeownership comes with a lot of responsibility and it’s important to look at all the tax breaks that you can get when buying a home. Here are some of the most common ones:

Mortgage Interest Deduction

One of the most popular tax benefits of owning a home is the mortgage interest deduction. This deduction allows you to deduct the interest on the first $750,000 ($375,000 if married and filing separately) of the mortgage debt. If you bought your home before December 15, 2017, the mortgage interest deduction limit is $1 million for single taxpayers and married people filing jointly, and $500,000 for married couples filing separately.

Mortgage Insurance Deduction

Mortgage insurance deduction is another important thing to consider when discussing tax breaks for homeowners. Mortgage insurance protects your lender if you’re unable to pay the mortgage on time. If you pay mortgage insurance, you can deduct it from your taxable income.

Only homeowners with an adjusted gross income up to $100,000 ($50,000 for married couples filing separately) can deduct their mortgage insurance. The deduction amount decreases when the income reaches up to $109,000 ($54,000 for married filing separately). If your taxable income is even higher than this, you won’t be able to benefit from this tax perk.

Mortgage Points Deduction

The next tax benefit of buying a home is the mortgage points deduction. If you paid points to lower your interest rate when you got your mortgage, you may be able to deduct those points from your taxes. One point is equal to 1% of the loan amount. So, if you paid two points on a $100,000 loan, you would be able to deduct $2,000 from your taxes. However, you’ll need to meet the criteria laid down by the IRS to fully deduct these points.

SALT Deduction

Tax benefits of buying a house also include the SALT deduction. The state and local taxes (SALT) deduction, allows you to deduct state and local taxes from your federal taxes. This includes property taxes; for example, if you paid $5,000 in property taxes last year, you would be able to deduct that amount from your federal taxes. The deductible amount is $10,000 for singles and couples and $5,000 for married filing separately.

Tax-Free Profits on Your Home Sale

The tax benefits of owning a house continue even when you’re planning to sell it. If you sell your home for a profit, you will not have to pay taxes on that profit. This is known as the capital gains exclusion and it applies to profits up to $250,000 for the head of household and $500,000 for married couples filing jointly. However, this applies if you’ve used that home as your primary residence for at least two out of the five years before the date of sale.

Residential Energy Credit

If you make energy-efficient improvements to your home, you may be eligible for an eco-friendly tax break. The credit is worth 22% to 30% of the cost of the improvements. Some of the eligible improvements include solar panels, insulation, and energy-efficient windows.

Home Office Deduction

Tax advantages of owning a home also include home office deductions. If you work from home or run a home-based business you may avail yourself of this benefit. To calculate the actual deduction amount you should determine the percentage of your home being used for office work. Another way is to deduct $5 per square foot, up to 300 square feet for the business use of your home.

Standard Deductions

When you file your taxes, you have the option of taking the standard tax deduction for buying a house or itemizing your deductions. The standard deduction is a set amount that is automatically deducted from your taxes. It is based on your filing status (single, married, etc.) and it changes every year. This year, the standard deduction for single taxpayers is $12,550 and the standard deduction for married couples filing jointly is $25,100. If your standard deduction is higher than other deductions you are eligible for, you should choose the standard one as it can offer you more home-buying tax benefits.

DID YOU KNOW: Taxes are quite complicated as it is and it can be difficult to calculate the exact amount of deductions. There are free tax consultants who can help you calculate and file your taxes.

Tax Benefits of Purchasing a House Before the End of the Year

If you’re planning to buy a house before the end of the year, there are some advantages as well as disadvantages you should consider.

Here are a few positive tax implications of buying a home before the end of the year:

Tax Deductions

Tax deductions on mortgage interest and mortgage insurance can reduce your tax liability significantly by the time you file your taxes for the year. If you need help, tax relief companies can consult you on how to reduce your taxable income.

Low-Interest Rates

Another reason to buy a home before the end of the year is to take advantage of the low-interest rates. Interest rates usually rise in the summer, so the end of the year may be a good time to get a low rate.

Less Competition

Apart from the tax advantages of buying a home at the end of the year, you can also avoid competition from other buyers. This can reduce the price of the house and put you in a strong negotiating position as sellers are eager to close the deal before the end of the year.

Here are some of the disadvantages of buying a home during the off-season:

Fewer Choices

The downside of buying a home before the end of the year is that there may be fewer choices available since not many people put their houses for sale during this period.

More People May Be Off From Work

The holidays are a time when many people take time off from work. This may make it more difficult to get in touch with the sellers or agents and to schedule showings. This can delay the home buying process, but if you’re patient you may land a great deal!

Does Buying a House Affect Your Tax Return?

We’ve already discussed the tax benefits of purchasing a home. Buying a house will certainly affect your tax return as it is a major financial investment. You will have to pay real estate taxes, mortgage, and other property taxes that come with buying a house. However, homeowners get several tax deductions that can reduce their taxable income significantly.

As a homeowner you can get:

  • mortgage interest deduction
  • mortgage insurance deduction
  • SALT deduction
  • home office deduction
  • energy credits
  • tax-free profits if you sell the house

You can either itemize these deductions or choose a standard deduction. The amount of both will vary depending on your tax filing status, i.e. whether you’re filing jointly or separately.

If your standard deduction is more than the itemized ones, you should go for a standard one. All taxpayers must take some time to determine the best way to make use of home purchase tax deductions. Compare the standard deduction with the itemized one and choose the option with the higher amount. You can either file your taxes on your own or get help from a tax service to help you through the process.

Key Takeaways

Buying a home is a major decision and you should consider the tax benefits associated with it.
Some of the tax benefits include mortgage interest deduction, mortgage insurance deduction, and mortgage point deduction.
Other benefits include SALT deduction, tax-free profits on your home sale, and home office deduction.
There are also benefits of buying a house before the end of the year like low-interest rates and less competition.
Buying a home affects your tax returns, and if you itemize all the deductions, you can reduce your taxable income significantly.

Are the Tax Benefits of Buying a Home Worth It?

The tax benefits that come with buying a home are considerable. The mortgage interest deduction, the SALT deduction, property credit, and the capital gains exclusion can all save you money on your taxes. And, if you work from home, you may be able to deduct some of your expenses. These deductions can add up to a lot of money, so the tax benefits may be worth it for you.

Just make sure to take your time to calculate the right amount so that you don’t miss out on any deductions! Moreover, consider the actual cost of buying a home while evaluating the home buyer’s tax benefits. Buying a home is not limited to just paying a monthly mortgage – consider the costs for home repairs, insurance, etc.

DID YOU KNOW: You can consolidate debt by taking out a mortgage loan that is larger than the number of your current debts. This will allow you to add up your debt payments into one monthly payment, making it easier to calculate the tax benefits. 

Wrap Up 

Although houses are quite expensive, there are several tax breaks for buying a home that can benefit new homeowners. These range from mortgage interest deductions to SALT deductions and home office deductions. If you calculate the tax credits and deductions correctly, your tax bill can be reduced significantly and you may benefit from buying a house!

FAQ

Do you get tax credit for buying a house?

Yes, you can get several tax credits like mortgage interest deductions, mortgage insurance deduction, SALT deduction, and mortgage point deduction.

How much tax savings do you get from buying a house?

The exact amount of tax savings will vary from person to person. However, the tax savings after buying a house are significant and can reduce your taxable income remarkably.

Does buying a house help with taxes?

Yes, there are several tax benefits of buying a home such as a mortgage interest deduction, SALT deduction, home office deduction, and mortgage point deduction.

Sources

ABOUT AUTHOR

I learned a lot about finance after working for a digital marketing company specializing in investing and trading stocks, forex, etc. After that, I got exposed to other verticals such as wealth management and personal finance, which further improved my understanding of the financial world.

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