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Tax Deductions First-Time Home Buyers Need to Know About - Quicken Loans Zing Blog

Buying a home isn’t cheap. But owning one can pay off come tax time.

That’s because owning a home comes with plenty of tax deductions and even some possible tax credits. If you’ve never owned a home before and this is the first time you’ve filed your income taxes since buying, it’s important to study the tax breaks that might be coming to you as a first-time homeowner.

Not understanding how these breaks work – and not understanding whether you qualify for them – could cost you plenty of dollars when you file your taxes this April.

Home Mortgage Interest Deduction

Perhaps the biggest tax break you’ll receive after buying a home is the home mortgage interest deduction. This break allows you to deduct all the interest you pay each year on a mortgage loan of up to $1.1 million. Odds are that your first mortgage loan is well under this limit.

This break is especially valuable during the earliest years of owning a home. That’s because you’ll pay more in interest than in actually reducing your principal during the first years of paying off a mortgage loan. The Congressional Research Service reported that the average homeowner claiming the mortgage interest deduction saved about $1,900 a year in taxes.

Melinda Kibler, certified financial planner with Palisades Hudson Financial Group’s Fort Lauderdale, Fla., office, says that the mortgage interest deduction usually ranks as the key one for homeowners.

“The mortgage interest deduction reduces taxable income dollar-for-dollar,” Kibler said.

Your mortgage lender will send you a form 1098 each year. This will list the amount of interest you paid on your mortgage during the prior year, a number that you will then enter when itemizing your taxes in April.

If you pay for monthly mortgage insurance premiums on FHA or conventional loans, these will also be reported on your 1098 and they are tax-deductible as well.

Home Equity Loans

You’ll gain another tax deduction if you take out a home equity loan or home equity line of credit. Homeowners take out these loans for a wide variety of reasons, borrowing against the equity in their home to pay for everything from major home improvements to covering part of a child’s college tuition.

Say your home is worth $150,000 and you owe just $100,000 on your mortgage. You now have $50,000 worth of equity. You might be able to take out a home equity loan of, say, $30,000. The interest you pay on that loan during the year is also tax deductible.

There is a limit, though: You can only deduct the interest paid on up to $100,000 worth of home equity.

Property Taxes

It’s no fun paying property taxes. Most homeowners pay these via an escrow arrangement, meaning that you pay a portion of your estimated yearly property taxes every time you send a mortgage check to your lender. When your property taxes are due, your lender uses the money that is stashed in your escrow account to pay your property tax bill on your behalf.

So property taxes make your monthly mortgage bill a bigger one. Fortunately, these taxes are also deductible, and can save you a bit each year on the taxes you owe. Your form 1098 sent by your lender will also list the property taxes you paid during the previous year.

Kibler said that homeowners need to be aware of an exclusion: Taxes charged for improvements that increase the value of a property are not deductible. This includes assessments for such projects as new sidewalks, water mains, sewer lines and parking lots.

Mortgage Points

Home buyers pay for points as a way to reduce the interest rate on their loans. Each point you buy will usually reduce the interest rate on a 30-year, fixed-rate mortgage loan by 0.25%. Buying one costs 1% of your mortgage loan amount. So if you were borrowing $200,000, and you wanted to reduce your interest rate by one point, you’d have to pay $2,000.

If you paid this $2,000 – or any amount – for mortgage points, you can deduct it on your income taxes.

Home Office Deductions

If you run a business from your home, you might be able to claim home office deductions. You can claim everything from a portion of your home’s utility and gas bills – calculating this percentage based on the square footage of your home office – to office supplies and the cost of a new computer.

Be careful, though, with these deductions.

Joshua Zimmelman, president of Westwood Tax & Consulting LLC in Rockville Centre, New York, said that you can only consider a space a home office if you actually only use it in that capacity and if you use it as a home office on a regular basis. So if you often sit at your kitchen counter with a laptop, don’t try to count your kitchen as a home office.

“The home office must be used regularly and exclusively for business, and be the primary site of the business,” Zimmelman said.

Damages or Theft Not Covered by Your Insurance

Say a tree falls on your home and your insurance company doesn’t reimburse you. You can deduct the costs of repairing the damage.

In general, you can deduct any unrecoverable losses resulting from damages to your home caused by such incidents as natural disasters or theft. The key word, though, is “unrecoverable.” You can’t deduct losses if your insurance company reimbursed you for them or you received reimbursement through a legal action. In other words, reimbursed losses are not deductible.

The Cost of Moving

Homebuyers usually can’t deduct the costs of moving to a new home, even a first one. But there is an exception: If you bought your new home because you had to move for work, you might be able to deduct moving expenses, depending on how far you had to relocate. Deductible expenses might include the dollars you spent on travel, renting a moving van, renting storage units or hiring movers.

These deductions can add up. But Bruce Ailion, a real estate agent with RE/MAX Town & Country in Atlanta, said that no deduction should be considered permanent. Members of Congress are always looking at ways to overhaul the country’s tax code. That could mean an end to some of these tax deductions for homeowners, Ailion said.

“We all know that there has been a push for a massive tax overhaul,” he added. “When it comes to tax reform, everything is on the table.” That means that even long-standing, expected deductions, like the mortgage interest deduction, are potentially “all subject to change or elimination,” according to Ailion.

The message here? Take advantage of homeownership tax deductions when you can. You never know if they’ll disappear.

Don’t forget to talk to your financial or tax advisor about your specific situation.

This Post Has 2 Comments

  1. You need to fix this article. Taxes are no longer deductible after 2017 with the GOP tax act they just passed. This is misleading.

    1. Hi John:

      I’m assuming you mean property, local and state taxes. These are still deductible: there’s just a new $10,000 total limit on the amount that can be deducted between these three pools. See here.


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