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Does Buying A House Help With Taxes? 8 Tax Deductions Homeowners Should Know About

Andrew Dehan7-minute read

December 22, 2021

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If you recently purchased a new home, it’s time for you to learn more about what that entails. Not only will you finally get the freedom of painting your walls with any color you want and creating the kitchen of your dreams, but you’ll also need to face the complexities of homeownership and taxes.

Does buying a home help with taxes?

Yes, in some ways you’ll see that buying a home will help with taxes. However, taxes as a homeowner are a bit more complicated than what you may be used to as a past renter. Whether you decide to stick with the standard tax deduction or choose to itemize your deductions, keep on reading to learn about homeownership and taxes.

What You’ll Learn: 

  • Standard versus itemized deductions
  • The different types of homeowner tax deductions you may come across
  • Which IRS tax forms you will need for each tax deduction type

Disclaimer: It’s best to consult with a tax professional before filing a tax deduction for legal considerations.

Table Of Contents

How Tax Deductions Work

A tax deduction allows companies and individuals to withdraw specific expenses from their taxable income, which decreases the overall tax bill.

There are two types of tax deductions. You can choose to take the standard deduction – the most common choice – or you can choose to itemize your deductions. A standard deduction is a flat amount that the federal tax system allows you to deduct. With a standard deduction, you don’t need to provide evidence of your expenses to the IRS.

Standard deduction is a flat amount that the federal tax system allows you to deduct whereas itemized deductions are a list of eligible expenses that can be claimed

On the other hand, you may choose to itemize your tax deductions. This is not as popular of a choice as sticking with a standard tax deduction, as it requires more paperwork on your part. However, you may find that you’ll be able to receive more money back by itemizing your deductions with your assets.

It’s best to consult with a tax professional before making any tax deduction. They know exactly how tax deductions must be filed, including the applicable tax codes. A tax professional will also give you customized advice depending on your financial situation.

8 Types Of Homeowner Tax Deductions

Even if you plan to stick with the standard tax deduction, as a homeowner, you should know of all the tax deductions available in case a write-off or two applies to your situation.

1. Property Tax

Let’s start with the most basic property-related tax deduction. As a homeowner, you must pay property taxes every year. This will be either directly to your county, municipality or city, or through a lender escrow account. You should be able to deduct up to $10,000 for the property taxes you paid during one taxation year.1


Here’s What You Need:

To receive your tax deduction for your property taxes, there are two different processes. If you paid your property taxes using a lender escrow account, you’ll need an IRS 1098 form from your mortgage lender to claim the deduction. The 1098 form should list your annual property tax.

If you paid your property taxes directly to your city, county or municipality, you’ll need to show proof of your tax payments. You can find these on your bank statements as an automatic transfer or in a check form.

2. Points

When you receive a mortgage loan, there’s an option to pay a lump of interest upfront to decrease your monthly mortgage payment. This interest lump is referred to as mortgage points because it’s normally seen as a percentage of the entire loan amount. For example, one point is equal to 1% of the loan.

Mortgage interest is tax-deductible, and the advanced interest payment may be tax-deductible as well. If you recently refinanced your loan or received a home equity line of credit, you may also receive tax-deductible points over the life of that loan.

Here’s What You Need:

Just like filing your property tax deductions, you’ll need the IRS 1098 form to find the tax-deductible amount. If you have a home purchase settlement sheet, you may find the deductible amount there. However, the IRS prefers the 1098 form.

3. Mortgage Interest

For homeowners who prefer to itemize their tax deductions, you’ll find mortgage interest tax deductions to be another large tax break. Apart from rare cases, you may be able to deduct all of your home mortgage interest. You’ll see higher interest payments at the beginning of your mortgage versus toward the end of your term, so it’s better to start claiming this tax deduction in the first several years of your mortgage when you’re charged the most for interest payments.

There’s a yearly cap of $750,000 on the amount you may deduct if you’re a married couple filing jointly or an individual taxpayer. The cap is at $350,000 if you’re a married couple filing separately.2 

Here’s What You Need:

You’ll need the IRS 1098 form to find the interest amount you paid in the previous taxable year to claim. Keep in mind if you purchased your home this year, you should include the interest you paid as part of the closing costs in the next taxable year, but not for the current year. This amount can be found on the home purchase settlement sheet.

4. Private Mortgage Insurance

If your home down payment was less than 20% of the purchase price of the home, you’re likely paying for private mortgage insurance, or PMI, along with your monthly mortgage payments. It’s possible to claim this as a tax deduction, however, requirements for this tax break have fluctuated a lot in the last several years. 

As of 2021, you must make less than $50,000 in gross income and file as single to be eligible for this deduction. If you make up to $100,000 in gross income and are a married couple filing jointly, you can also claim your PMI payments.2


Here’s What You Need:

You’ll also need the IRS 1098 form from your mortgage lender to claim your PMI payments.

5. Mortgage Credit Certificate

You may be issued a mortgage credit certificate by a local or state governmental agency program. Mortgage credit can be used by lower-income families to purchase and afford their homes, or by first-time home buyers who have not owned a home in the last three years. If you’re a family or first-time home buyer who received a mortgage credit certificate, you may claim a tax credit for a portion of the mortgage interest that is paid each year, capped at $2,000.3


Here’s What You Need:

You’ll need the IRS 8396 form to claim mortgage credit.

6. Renewable Energy

If you recently installed environmentally friendly upgrades into your home, not only did you add value to your home, but you may be able to claim these improvements as a tax credit. This can include installing solar panels on your roof, a new wind turbine or an updated insulation system. Some of these green improvements are eligible for a credit amount up to $500, while some may earn you a credit between 10 – 30% of the upgrade cost, depending on the extent of the improvement.

Some upgrades like water heaters and outside doors have become so common that they aren’t eligible anymore. Before claiming these improvements for tax credits, speak with your tax professional to see which upgrades will qualify.

Here’s What You Need:

You’ll need the IRS 5695 form to claim these tax credits.

7. Home Office

You may receive a tax deduction if you’re a self-employed business owner who uses a part of your home strictly for your business. You must have significant proof that your office space is the main location of your business. This space has to be used only as a home office for business purposes. You may deduct based on the square footage of your office space.

You can deduct $5 per square foot, capping at 300 square feet of space. You won’t be eligible for a tax deduction if your home office is a bedroom with an added workstation.

This is considered to be a riskier tax write-off, as the IRS requires detailed proof that you use your home as a part of your business.

Here’s What You Need:

You’ll need the IRS 8829 form to claim expenses for your home business use.

8. Home Equity Debt

As a homeowner, you build home equity as you pay off the home’s purchase price. You may use the equity you’ve built up in your home to take out a loan, such as a HELOC or home equity loan. Both of these loans charge interest, which can be tax-deductible if you plan to use the loans for a home improvement or renovation project.

If you plan to use a HELOC or home equity loan to pay for education fees or a large investment like a boat, the interest you’re charged won’t be eligible to be deducted.


Here’s What You Need:

You’ll also need the IRS 1098 form from your mortgage lender to deduct interest from your home equity debt.

Homeowner Tax Breaks FAQs

How do tax credits work? 

Tax credits reduce your tax bill dollar for dollar, therefore making them more valuable than a tax deduction. If you plan to renovate your home with environmentally friendly upgrades, look into your state and local incentives to see what tax credits and rebates may be offered to you.

Can you claim home improvements on your taxes?

Completing home improvement projects can earn you additional tax breaks in the long run. Not only are improvements more desirable to potential buyers, but you may add home improvement costs to your home’s purchase price when you sell your home. This will reduce your profit, but it can decrease your capital gains tax.

You may be exempt from having to pay capital gains tax if the home’s sale rakes in less than $250,000 in profit and you’re a single tax filer. If you file jointly, you may be exempt if it’s less than $500,000 in profit.4

If you’re planning to claim this type of tax break, the most important thing to do is to organize all of your improvement purchases and expenses, whether it’s an invoice or receipt. Refer to a tax professional to help you navigate these home improvements and see which ones you may receive a tax break for.

Bottom Line

Homeownership is a valuable way to earn wealth, but if you live in a county or state with a high property tax, you may be negatively impacted. Do your research on specific laws and requirements for your area and discuss with a tax professional for further advice before itemizing tax deductions.

As a homeowner, picking out a loan that’s right for you can not only help you build equity in your home, but can also allow you to invest your money somewhere that may have a higher rate of return. Talk to a Home Loan Expert who can help you learn more about the refinancing options that are available to you and how to best navigate paying off your mortgage loan.

Sources:

1IRS Newsroom

2IRS

3FDIC

4TurboTax

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Andrew Dehan

Andrew Dehan is a professional writer who writes about real estate and homeownership. He is also a published poet, musician and nature-lover. He lives in metro Detroit with his wife, daughter and dogs.