For first-time home owners, it can be confusing trying to understand what kind of tax deductions and benefits you get the first time Tax Day rolls around after buying your home. If you are used to renting, you’re likely used to having few deductions on your tax form aside from those set aside for dependents. Once you make the leap into home ownership everything changes, and a whole new set of deductions is available to you. As a new owner, it is important that you familiarize yourself with these new deductions to make sure you take full advantage of them when filing each year in the future. Additionally, it is important to refrain from getting carried away with deductions and educate yourself in what kind of expenses are nondeductible. These are some of the most common deductions (and nondeductions) available to homeowners currently.
Deductible: Mortgage Interest
Typically, the biggest tax deduction for owning a home comes from deducting interest on your mortgage. You are allowed to deduct interest on up to $1 million of debt used to purchase your home. In January, you will receive a Form 1098 from your lender listing the amount of interest you paid on your mortgage during the previous year, and that is the amount you deduct on Schedule A. For homeowners in the 25% tax bracket, deducting the interest basically means the government is paying 25%. For example, a $2,000 deduction will reduce your tax bill by $500.
The IRS allows you to deduct points in the year you paid them if, among other things, the loan is to purchase or build your primary home, payment of points is an established business practice in your area and the points were within the usual range. Make sure your loan meets all these qualifications so that you can take advantage of all of the deductions for points at the same time.
Deductible: Property Taxes
A tax break for paying taxes? That’s right. When you make your loan payment each month, it’s likely that a huge part of the payment goes to taxes, which go into an escrow account for payment once a year. This amount should be included on the Form 1098 you get from your lender, along with your loan interest information. As long as you own your home, you can take a deduction for these taxes.
If you are a new owner, it is important to also check out the settlement sheet you got when you closed on the house to find additional tax payment data. When the property became your’s, the year’s tax payments were divided so that you only paid taxes for the portion of the tax year that you owned the home. Those taxes you paid are deductible.
Not Deductible: Some Insurance, Dues and Repairs
If you have private mortgage insurance because you weren’t able to offer a large enough down payment on your home, you probably won’t be able to deduct those expenses. Property hazard insurance premiums are also nondeductible, even though property hazard coverage is typically required as part of a home loan. Other nondeductible expenses include homeowners association dues/fees, depreciation of your home, general closing costs and local assessments to increase the value of the neighborhood you live in. Home repairs are also nondeductible.