Purchasing a new home means more than having a monthly mortgage payment. It also means you have access to many more tax write-offs you did not have before. Before you start your taxes after purchasing a new home, learn about these various write-offs to see how you can reduce your tax liability.
Start Itemizing your Deductions
The first step is to start itemizing your deductions now that you own a home. If you used to take the standard deduction, this means more complicated tax preparation. The process is well worth it, though. In addition to the benefits you receive from owning a home, you can also start writing off things like charitable contributions and even state tax payments. None of these things mattered to your tax liability before if you took the standard deduction, but they can improve your financial situation now.
Deduct Points Paid
If you paid any points for your mortgage, you should claim them on your taxes. There are strict requirements you must meet in order to deduct the points, but most first-time homebuyers meet these rules:
- The home must serve as collateral for the loan you paid points on
- The amount of points you paid must be typical for your area
- You put a down payment on the home that equals the amount of points you paid
Let’s discuss the last point. Your down payment has to be equal or greater than the amount you paid in points. For example, if your loan amount is $200,000 and you paid 2 points, you paid $4,000. You must put at least $4,000 down on the home in order to write off the $4,000 expense in points. This is not hard to do since most programs, with the exception of the VA loan, require at least 3% down on the home.
Mortgage Interest Paid
In addition to points, you pay interest on your mortgage. In fact, a majority of your initial payments are interest with very little principal getting paid. The interest you pay is usually tax deductible. As of right now, you can deduct interest on loans up to $1 million. The interest you can deduct includes the money you pay in your regular monthly payments as well as the interest you pay at the closing. You can find the amounts you paid in two places:
- Form 1098 that your lender sends you showing the interest you paid
- Your closing statement will show the interest you paid from your closing date to the end of the month
Real Estate Taxes
Just like mortgage interest, real estate taxes are something you can deduct every year you own the home and pay the taxes. During the year you bought the home, you might have an additional tax write-off if you reimbursed the seller for taxes he prepaid. For example, let’s say the seller paid all taxes for 2016, but sold the house to you in August of 2016. This means he paid for your portion of real estate taxes from August through December. On your settlement statement, you will likely see a charge for the real estate tax reimbursement to the seller. You can include this amount in your tax write-offs this year. In future years, you include the real estate taxes you pay through your escrow account or on your own. It is up to you to keep track of the amount paid to the county, though, in order to deduct it.
Energy Efficient Changes
If you happened to make any energy-efficient changes to your home upon moving in, you can deduct those expenses as well. This write-off can come in very handy during the first year you own the home. You can also use it if you make changes in the future. The write-off exists if you make any changes, such as:
- Adding skylights
- Changing the doors or windows
- Changing the insulation
- Replacing the roof
You can obtain a tax credit, which comes right off of your tax liability. The maximum credit equals $500.
If you make more expensive changes, such as installing a solar powered water heater or generator, you can take a tax credit for 30% of the cost of the improvement.
Private Mortgage Insurance
This is the last year for the Private Mortgage Insurance deduction on your taxes. The deduction was set to expire earlier, but received an extension through the end of this year. This applies to all mortgage insurance whether you pay it on a conventional loan or government-backed loan, such as an FHA loan. Your lender will document the amount of mortgage insurance you paid throughout the year in Box 4 of Form 1098 which you will receive in January. There are a few requirements you must meet:
- The mortgage insurance contract must be dated after January 1, 2007
- If you refinanced and pay PMI, you can only deduct the amount you pay on the original loan amount (if you took cash out of the equity of your home, that amount does not count)
- Your adjusted gross income should not exceed $100,000
Owning a home does give you access to many tax write-offs. This does not mean you should get in over your head and purchase a home you cannot afford, though. Keep in mind the mortgage payments you must make and the cost of the upkeep of the home. The write-offs you receive are a nice bonus, but they should not be the only thing you consider when deciding whether to buy a home.