5 Home Buying Tax Benefits You Must Know

Purchasing a property is probably the most significant investment you will make in your lifetime. It comes with plenty of benefits – being able to enjoy your own space after years of renting, for example. However, did you know that you could also get several tax breaks for buying a house?

Most of these tax benefits are tax deductions: your tax bill will not be directly reduced by buying a house (as opposed to tax credits for homeowners). However, they will reduce your adjusted gross income - in other words, your taxable income. It is particularly interesting for those who are hoping to reduce their tax bracket.

Some programs used to offer first-time homebuyer tax credits, particularly at the height of the housing crisis. However, most of these programs are now defunct. A notable exception is the federal tax credits available in some states for installing some energy efficiency systems to your house (solar panels or geothermal heating system, for example.)

Check with your tax professional to know more about which tax breaks for buying a house may be available for you.


Mortgage deductions

Mortgage interest deduction

If you itemize your tax deductions, you can deduct the interest paid on your home mortgage, whether it is your primary or secondary residence. For individual taxpayer or married couples filing jointly, you can deduct the interest paid on up to $750,000 of mortgage debt ($375,000 for married couples filing separately. This tax deduction is available for primary mortgages, but also secondary mortgages such as home equity loans and home equity lines of credit (HELOC).


Mortgage point deduction

In some cases, you may also be able to deduct the mortgage points (also known as discount points) you paid at closing. The requirements to deduct mortgage points are as follow according to the IRS:

  • Your loan is secured by your main home. (Generally, your main home is the one you live in most of the time.)
  •  Paying points is an established business practice in the area where the loan was made.
  • The points paid weren't more than the points generally charged in that area.
  • You use the cash method of accounting. This means you report income in the year you receive it and deduct expenses in the year you pay them. Most individuals use this method.
  • The points weren't paid in place of amounts that ordinarily are stated separately on the settlement statement, such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes.
  • The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. The funds you provided aren't required to have been applied to the points. They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. You can't have borrowed these funds.
  • You use your loan to buy or build your main home.
  • The points were figured as a percentage of the principal amount of the mortgage.
  • The amount is clearly shown on the settlement statement (such as the Uniform Settlement Statement, Form HUD-1) as points charged for the mortgage. The points may be shown as paid from either your funds or the seller's.


Real estate taxes deductions

Good news! The property taxes you pay to your town are deductible up to $10,000 for single taxpayers and married couples filing taxes jointly and $5,000 for married couples filing separately. This deduction is also applicable for the real estate taxes you may have reimbursed your house seller at closing as well.


Private mortgage insurance

If your lender required you to take a private mortgage insurance and your adjusted gross income is below $50,000 ($100,000 for a married couple filing jointly), you may be able to deduct your PMI payments.


Home-based businesses

If you work primarily from home and can prove that you use part of your home (home office) exclusively to conduct your business, you may deduct the cost of your home office from your taxes. You can either deduct $5 per square foot, up to 300 square feet, or determine precisely the percentage of your home used for business activities.


Tax-free profits when you sell your house

You won’t be able to access one of the most interesting tax breaks for buying a home until you sell it. However, when you do, you will be able to exclude up to $250,000 ($500,000 for married couples filing together) of the capital gains on the sale of your property from your taxable income as long as:

  • You have maintained the home as your primary residence in two out of the preceding five years
  • You have not claimed the capital gains exclusion for the sale of another home during the previous two years


Please check the complete list of Tax Information for Homeowners on the IRS website here and don't hesitate to consult with a tax professional while making critical financial decisions such as buying a house. You can also find the answer to some of your most pressing questions on the home buying process in our Mortgage Learning Center.


Looking for more Foundation tips and learning? Return Home here.

Published 01.20.22

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