If you’re looking for your first home, you should know that you can get a tax break for buying a house. The IRS encourages homeownership with several tax deductions and credits that you can claim, in most cases, year after year, as long as you own your home and use it as your primary residence.
But these deductions and credits may come with limitations; how much you can reduce your tax bill will depend on your income and tax bracket. You must itemize your tax deductions if you want to claim any tax breaks for buying and owning a home. Here’s what you need to know.
- The Internal Revenue Service (IRS) allows you to claim tax deductions and credits for various expenses like mortgage interest, property taxes, and mortgage insurance.
- You can deduct up to $10,000 a year in property taxes you've paid.
- Claiming deductions involves itemizing, which means foregoing the standard deduction for your filing status.
- A pending change to the tax code could provide first-time homebuyers with a tax credit of up to $15,000.
How Do You Get a Tax Break for Buying a House?
To get the deductions for mortgage interest and property taxes you paid, you must itemize your deductions. This involves adding up everything you spend on tax-deductible expenses each year (not just your home) and claiming the total. If your total itemized deductions exceed your standard deduction for the tax year, it usually makes sense to itemize.
The standard deduction for married taxpayers who file joint returns is $25,900 for tax year 2022. It’s $12,950 for single filers, and $19,400 for those who file as head of household. If you’re single and own a home, you’d need at least $12,951 in itemized deductions to make itemizing worth your while. Otherwise, you’d be paying taxes on more income than you have to.
The deductions you itemize affect the total amount of income that the IRS taxes you on, whereas a tax credit reduces the amount of your tax bill that you pay. For example, if you made $50,000 per year and your itemized deductions totaled up to $12,000, you’d only have to pay taxes on $38,000 of income. On the other hand, if you owed $2,000 in taxes, and claimed a tax credit worth $1,000, you’d now only owe $1,000 in taxes.
Itemized deductions include several other expenses in addition to home-related costs, but the standard deductions are rather generous under the terms of Tax Cuts and Jobs Act (TCJA), at least through 2025.
What Are the Tax Breaks and How Much Are They?
Buying a house opens the door for several tax deductions and credits if you itemize, but they are subject to rules and limitations.
Mortgage Interest Deduction
For mortgages signed before Dec. 15, 2017, you can deduct the interest portion of your monthly payments for the first $1 million of a mortgage (the limit is $500,000 each for married people filing separately).
If you got your mortgage after Dec. 15, 2017, then the mortgage limit for interest deductions is $750,000 ($375,000 if you’re married and file a separate return). For example, if you have a $1 million mortgage, you could only deduct interest paid on the first $750,000. These limits apply to your first and second home combined.
This deduction also covers home equity loans, mortgage refinances, and home improvement loans, but mortgage interest is only deductible if the loan proceeds are used to “buy, build, or substantially improve” your home, according to the IRS. For example, interest paid on a home equity loan wouldn’t be tax-deductible if you use the money to pay off your debts or finance your child’s college education.
You can deduct mortgage points you paid, too. Paying “points” refers to prepaid interest included in your closing costs. Doing so reduces your monthly payments if you own the house long enough. In general, you can include points in your mortgage interest deduction, provided that you can meet certain requirements, such as:
- Paying points is a common practice in your area
- Your lender calculated your points as a percentage of the loan’s principal
- The points you paid are reasonable based on what’s usually charged in the area
- The points aren’t for things like attorney, inspection, appraisal, or title fees
Property Tax Deduction
You can claim an itemized deduction for up to $10,000 in property taxes you paid per year, but restrictions apply here, too. This deduction applies to all state and local taxes you pay, not just property taxes.
The $10,000 deduction on property taxes drops to $5,000 if you’re married and file a separate tax return.
For example, you could deduct $5,000 in income taxes paid and $5,000 in property taxes. But if you paid $7,000 in income taxes and $5,000 in property taxes ($12,000 total), your deduction would still be limited to $10,000—that additional $2,000 isn’t tax-deductible.
If your mortgage lender pays your property taxes via an escrow account, you can only deduct taxes that have actually been remitted to the taxing authority. You might pay $200 a month to your lender toward escrow, but you can’t claim a tax deduction for that money until your lender sends it to your state or county.
Some states offer tax deductions and credits for property taxes when you file your state taxes.
Mortgage Interest Credit
The mortgage interest credit is based on mortgage credit certificates (MCCs), which are a part of a state-level program that allows you to take a tax credit for mortgage interest you paid up to a certain number of years after you purchase your home. This tax credit is a valuable one because it reduces the taxes you owe, rather than reducing your taxable income.
If you live in a state that offers MCCs, then you’ll likely get to take a tax credit for 20% to 40% of the mortgage interest you paid. The maximum credit you can take is $2,000.
Mortgage Insurance Premiums Deduction
If you take a mortgage out to buy your home and you make monthly payments for mortgage insurance, then you might be able to deduct that insurance. The IRS requires the insurance to be “qualified,” which means that the mortgage insurance is from one of the following sources:
- Department of Veterans Affairs (VA loans)
- Federal Housing Administration (FHA loans)
- Rural Housing Service (USDA loans)
- Private mortgage insurance (PMI)
While there is no set limit to how much you can deduct, the amount you can deduct will decrease 10% for every $1,000 that your modified adjusted gross income (MAGI) exceeds $100,000 ($50,000 if married filing separately). So, if your MAGI is $102,000, the amount you could deduct drops by 20%. The deduction is eliminated once your MAGI exceeds $109,000 ($54,500 for married filing separately).
First-Time Homebuyer Act of 2021: Tax Credit of Up to $15,000
A homebuyer-friendly change to the tax code was pending in Congress as of April 2022. This change could add a tax credit to the breaks that some homebuyers can claim. The First-Time Homebuyer Act of 2021 provides for a credit equal to 10% of the purchase price of your home, up to a $15,000 limit ($7,500 for married filing separately). As the name implies, you must be buying your first home to qualify. The proposed tax credit was introduced in 2021.
Frequently Asked Questions (FAQs)
What documents do I need for taxes after buying a house?
You must itemize to claim the mortgage interest or property tax deductions. This means completing and filing Schedule A with your tax return. The schedule lists all your deductible expenses. You’ll transfer the total to Form 1040, instead of simply claiming the standard deduction. You should also receive a Form 1098 from your lender if you paid more than $600 in mortgage interest that year.
How does buying a house in cash affect your taxes?
Paying cash for your home eliminates the possibility that you can claim the mortgage interest deduction unless you subsequently take out a home equity loan to make improvements to the property. You’d probably still be able to claim the itemized deduction for property taxes.
What taxes do I pay when buying a house?
Real estate transfer taxes can come due in some states when a house is sold, but home sellers, not homebuyers, are typically responsible for paying this tax. Most states do not impose a sales tax on home sales, but some states charge an additional “mansion tax” on homes with sale prices above a certain amount ($1 million, in some cases).
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