You probably know that homeownership comes with tax-savings opportunities. But if you hopped into the red-hot real estate market for the first time this year (congratulations!), then you might not be familiar with all the specifics. Or maybe you’ve owned a home before, but it’s been a while since you dug into the tax ramifications in that first year after buying — and the tax law is constantly changing. So what kind of tax breaks for buying a house can you get these days?
We found 14 possibilities — from deductions to credits to other potential savings opportunities you might not have even considered. Read on!
A tax deduction is a line item that reduces your adjusted gross income, which has the result of reducing your taxable income. Let’s go through some of these available to homebuyers and homeowners.
Mortgage interest deduction
Before the Tax Cuts and Jobs Act, homeowners could deduct interest on up to $1 million in mortgage debt if married and filing jointly, or $500,000 if single or married and filing separately. If you bought your home between October 13, 1987, and December 16, 2017, you can still take advantage of this higher limit. If you purchased your home after December 16, 2017, the new legislation lowered this limit to $750,000 for married tax filers or $375,000 for those single or married and filing separately.
“Although buying a house can be quite scary for many, it’s actually a key to several nice tax breaks,” says Dmytro Serhiiev, a professional tax specialist at PDFLiner. “The super-great news is that your mortgage interest payments and even late fees (sometimes) are deductible.
“Your lender must send you the IRS Form 1098 after the end of every tax year. You can find the amount of interest you paid in that form. Make sure to include the amount in your tax return to request deduction.”
Real estate tax deduction
Most homeowners can take a real estate tax deduction; the Internal Revenue Service (IRS) allows deductions for real estate taxes on homes and rental properties. Make sure you deduct the property tax in the year you pay it.
Mortgage points deduction
Typically, the IRS allows homeowners to deduct the full amount of their mortgage points in the same year that homeowners pay them.
If the amount you borrow to buy your home exceeds $750,000 (or $1 million for mortgages originated before December 15, 2017), the number of deductible points is typically limited.
Mortgage insurance (MI) or private mortgage insurance (PMI) deduction
Buyers who can’t come up with a 20% down payment are often required to buy mortgage insurance (MI) to mitigate the lender’s risk.
You can deduct the amount paid for private mortgage insurance (PMI), FHA mortgage insurance premiums, VA funding fees, and USDA loan guarantee fees, as long as the insurance contract was issued in 2007 or later and you’re still paying premiums.
You can’t deduct this if your adjusted gross income (AGI) exceeds $109,000, or $54,500 for single filers or married couples filing separately. (And the amount you can deduct will be reduced if your AGI exceeds $100,000, or $50,000 for single filers or married couples filing separately.)
Home office deduction for self-employed
If you are self-employed, you may be able to deduct the space you use as an office within your home.
To be eligible for the home office tax deduction, you’ll need to be a self-employed business owner or a freelancer. You’re unlikely to qualify as a W-2 employee earning a paycheck from an employer. (So, no — telecommuting instead of going into the office these days doesn’t make you eligible.)
You must also use the space primarily for the regular use of your business.
Deductions for certain home improvements
If you take out a home equity line of credit (HELOC) to pay for a remodel, you can deduct interest you pay on that loan — as long as you use the money to buy, build, or substantially improve the property.
These improvements must add value to the home, prolong its livability, or adapt it to a different use. Think roof replacement or building an addition that enlarges the home (but you can’t deduct a new coat of paint alone).
Medically necessary home improvements also qualify here. You can claim expenses that exceed 7.5% of your adjusted gross income (as with other medical expenses) for such requirements as widening hallways and doors, or installing ramps for wheelchair accessibility for a family member.
Home sales proceeds deductions
Home sale proceeds are considered capital gains. But most homeowners won’t have to pay capital gains taxes on the full amount when selling their primary residence, which makes you eligible to exclude capital gains (recognized on the sale for the first $250,000 for single filers or up to $500,000 for married couples filing jointly).
You can also deduct costs associated with selling the home, such as escrow fees, the cost of advertising the property, or even the cost to stage it.
Rental expenses/depreciation if you rent part of your house
If you regularly rent out part of your home — or even do it for a portion of the year, say when you go on an extended vacation — you can deduct certain expenses to help offset the income you bring in this way. Expenses like mortgage interest, insurance, utilities, real estate taxes, and the cost of maintenance are all eligible deductions.
A tax credit is an amount taken off of your tax bill. For example, if you get a $1,000 tax credit, your tax bill due will shrink by $1,000 — it’s a dollar-for-dollar reduction in the taxes you owe.
The MCC program was designed to help lower‐income buyers get into homeownership: It’s a dollar-for-dollar tax credit to recipients. It can even help borrowers get a loan who might not otherwise qualify by reducing their net monthly mortgage payment.
To be eligible, you must be a first‐time homebuyer, meet the program’s income and purchase price restrictions, and use your home as your primary residence.
The residential energy property credit available under the Consolidated Appropriations Act of 2021 is new for 2021.
“This credit allows for a credit equal to the applicable percent of the cost of qualified property,” explains Josh Zimmelman, managing director of Westwood Tax & Consulting in Rockville Centre, New York.
As of December, 31, 2020, qualifying properties include:
- Solar electric property
- Solar water heaters
- Geothermal heat pumps
- Small wind turbines
- Fuel cell property (subject to a limitation of $500, with respect to each half kilowatt of capacity of the qualified fuel cell property)
- Qualified biomass fuel property expenditures
In 2021, homeowners may claim a credit for 10% of the cost of qualified energy-efficiency improvements and the amount of the residential energy property expenditures paid or incurred during the year. Qualified energy-efficiency improvements include:
- Windows, doors, and skylights that are energy-efficient
- Roofs (metal and asphalt) and roof products
Residential energy property expenditures include:
- HVAC (heating and air conditioning) energy-efficient systems
- Water heaters (natural gas, propane, or oil)
- Biomass stoves
There are some lifetime limits built into the residential energy property credit:
- A total of $500
- $200 total for windows
- $50 per advanced main air circulating fan
- $150 for qualified furnaces or hot water boilers (natural gas, propane, or oil)
- $300 for “any item of energy-efficient building property,” per the IRS
First-time buyer credit
While you won’t want to bank on this one just yet, there’s a potential new tax break on the horizon for 2021: a first-time buyer tax credit.
“There is currently a proposed bill, the First-Time Homebuyer Act, being discussed in Congress that would provide a tax credit of up to $15,000 for first-time homebuyers who meet certain criteria,” Zimmelman explains. “But this has not been passed into law yet.”
The act would provide a refundable tax credit up to 10% of the purchase price up to $15,000. That means if you’re an eligible homeowner who paid $400,000 for your house, you would receive the maximum of $15,000 credit subtracted directly from your tax bill. (Using this example, if you would have owed $10,000 in taxes, you would receive a $5,000 refund instead due to the credit.)
Other tax breaks
As a homeowner, you may qualify for other tax breaks based on your specific circumstances. For instance:
- If you’re a first-time buyer and dip into your Roth IRA for down payment reasons, you can use up to $10,000 tax-free. Thought you’ll have to pay income taxes on anything you take out above $10,000.
- You can get a tax break for imputed rent, which in plain terms “is what homeowners pay to themselves to live in their house,” explains LoanAdvisor finance professional Rasti Nikolic. Owners won’t pay taxes on this income and don’t have to count the rental value of the homes as taxable income.
- If a lender forgives all or some of your debt after a foreclosure, short sale, or deed in lieu of foreclosure, you may be able to exclude the canceled amount from your income for federal tax purposes through 2025 under the Consolidated Appropriations Act of 2021.
So there are many possible ways to get tax breaks as a homeowner in the first year and well beyond — but they can be overwhelming (or downright confusing).
Rodney Moser, a Salt Lake City real estate agent who sells 33% faster than the average agent, recommends talking to a tax professional to understand the implications for your specific situation, and we second that opinion!
Header Image Source: (Joseph Kellner / Unsplash)