Buying a home buys you a lot of tax benefits. Here’s what you can claim and a few things you can’t.
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Get Early Access to Your Retirement Money for Your Down Payment
Since buying a home helps you build wealth, the tax code lets you use part of your retirement savings for a down payment without the usual early withdrawal penalties.
- If you withdraw from a traditional IRA, you can withdraw up to $10,000 with no penalty if you qualify as a first-time homebuyer. Income taxes do apply.
- If you withdraw your earnings from a Roth IRA, the same rules apply as traditional IRAs. But, you can withdraw all of your contributions at any time for any reason with no taxes or penalties as long as you’ve had a Roth IRA for five years.
- 401(k)s don’t have an early withdrawal exception to buy a home, but you can use a 401(k) loan tax-free.
Property Tax Deduction (Real Estate Tax Deduction)
Everybody has to pay property taxes. When you rent, they’re included in your rent, and your landlord gets the tax benefits. When you own your home, you can deduct up to $10,000 in property taxes per year.
To claim your deduction, a few rules apply.
- You have to itemize your deductions. If you use the standard deduction, you lose the property tax deduction (but the only reason to not itemize is your standard deduction would be bigger).
- You get up to $10,000 in combined property taxes and income taxes. If you’re a high earner, you may not get the full $10,000. The property tax deduction is part of the SALT deduction. SALT stands for State And Local Taxes.
- Both single and joint filers get $10,000 (yes, this is a marriage tax situation). Married filing separately filers get $5,000 each.
Note: If you have a mortgage, real estate taxes won’t appear directly on your Form 1098 from your mortgage lender. Your property tax deduction is usually based on the property taxes your lender paid at the time it paid them.
Remember that not all of your escrow funds will go to deductible expenses. In addition, your entire property tax bill may not be deductible since it may include non-ad valorem charges you can’t deduct.
Mortgage Interest Deduction
Part of your mortgage payments are also deductible. The biggest deduction is for mortgage interest.
If you’re buying a home today, you can deduct interest on the first $750,000 of your mortgage. So if you have a 1% mortgage, you can deduct $7,500 the first year. Next year, the deduction will be a little lower since you’ll pay less interest per year as you pay down your mortgage.
If you take out a home equity loan or home equity line of credit to make home improvements, that also qualifies for the interest deduction with the same $750,000 limit.
Mortgage Points Deduction
You can also deduct mortgage points since points are a payment to reduce your interest rate. Many homeowners can qualify to deduct the full amount of the points in the year they buy their home. If not, you’ll deduct your points over the life of your loan.
Mortgage Insurance Deduction
Mortgage insurance isn’t exactly interest, but it’s close enough that you can also get a tax deduction for it. To qualify to fully deduct your mortgage insurance premiums, you need an adjusted gross income of up to $100,000. If your AGI is up to $109,000, you get a reduced deduction.
The mortgage insurance deduction is another marriage tax situation. The same limit applies to single and joint filers. Married filing separately filers need an AGI of up to $50,000/$54,500 each.
What if you’re not on the deed?
You can still claim mortgage interest if you hold an equitable (rather than legal) title to the property. You have to have an agreement that you will own all or part of the home in exchange for your payments and that your name will eventually be added to the title.
Sell Your Home Tax-Free
If you decide to take advantage of a rising housing market, you can sell your home tax-free. If you’re single, you pay no taxes on up to $250,000 in gains. If you’re married filing jointly, you get up to $500,000 in tax-free gains.
The gains are your selling price minus what you paid for your home. So if you sold for $400,000 and paid $150,000 as a single filer, you pay no taxes.
If your profit on the sale is above the tax-free limit, you pay capital gains tax only on the amount you’re over the limit.
Home Office Deduction
If you work from home and are self-employed, you may qualify for the home office deduction. Sorry, employees, but you’re not eligible.
Follow that link and read the rules carefully, because there are a lot of technicalities with this deduction.
Miscellaneous Tax Credits
Congress is always passing miscellaneous tax credits that can help homeowners. Think things like installing solar panels or upgrading to a more energy-efficient AC system.
Most of these credits are temporary. They may be for only one year or just a few years.
For the current tax credits, see the IRS credits page and look for the Homeowner Credits section.
Homeownership Tax Credit
There is currently no general homeownership tax credit. A proposed federal first-time homebuyer credit did not pass.
You may be eligible for state or local home-buying programs.
Not Deductible: Home Improvements and Repairs
Home improvements and repairs are generally not deductible. However, if your home is damaged by a disaster, such as a hurricane, you may be eligible for a casualty loss deduction that covers the repairs.
If you have a home office or a home you use as a rental property, these expenses may be eligible for business deductions.
Not Deductible: HOA Dues
HOA dues and other fees are also generally not tax deductible. These are personal expenses.
You may be able to claim part of your HOA dues as part of the home office deduction. HOA dues for rental properties are also generally deductible as a business expense.
Not Deductible: Private Mortgage Insurance (PMI)
PMI is currently not tax-deductible. Through 2021, certain PMI payments could be deducted as part of your interest expenses.
The PMI deduction was originally eliminated as part of the Tax Cuts and Jobs Act starting in 2018. Congress passed several short-term extensions of the PMI deduction but has not passed an extension for tax year 2022 and beyond.