Taxes

Understand These Tax Breaks When Buying a Home

*Updated for tax season 2021 and 2022.

Buying a home can help lower your tax bill in certain circumstances. In fact, tax breaks for homeownership are a primary motivation for many people to buy their own homes.

To get the maximum tax benefit from your home purchase, it’s important to understand what options are available to you.

Here are some potential tax deductions for homeowners to keep in mind when purchasing a home.

Property tax deduction and mortgage interest deduction

Your house payment includes both interest and principal payments. You may also pay insurance and property tax payments to an escrow account managed by your mortgage holder. Your mortgage holder, in turn, pays your home insurance and property taxes when they’re due. When required, you may also pay other charges, like insurance premiums.

If you itemize your deductions, you can generally take a tax deduction for the home mortgage interest paid to your bank or another lender. Due to the Tax Cuts and Jobs Act, the amount you can deduct depends on when you bought your house. If you purchased your home after Dec. 15, 2017, you could deduct interest on the first $750,000 of your mortgage. Homeowners who bought houses or entered a binding written contract before that date can deduct interest paid on the first $1 million.

You can also deduct the property and real estate taxes you pay during the tax year. Again, you can only take this tax deduction if you itemize by using Schedule A. Filers can deduct up to $10,000 in property and income or sales tax on their returns for the current tax season. This can also apply to taxes paid on other property such as cars, RVs, boats, land, second homes, or vacation homes.

Private mortgage insurance premiums are deductible

Private mortgage insurance (PMI) is coverage your lender may require you to buy if you put less than a 20 percent down payment when purchasing your home. PMI protects the lender against your default. If you itemize and the insurance contract was issued after 2006, you can deduct your PMI.

Once your adjusted gross income (AGI) exceeds $100,000, the deduction starts to phase out ($50,000 for married filing separately). The phaseout requires you to subtract 10 percent from the total premium amount you paid for each $1,000 of your income that exceeds $100,000 (or $50,000 for married filing separately). The deduction is eliminated if your AGI is above $109,000 ($54,500 if married filing separately).

Remember, your total itemized deductions only benefit you if they are greater than the standard deduction. If you take the standard deduction when you file your return, you won’t be able to deduct your mortgage interest, property taxes, or PMI premiums.

For tax years 2021 and 2022, the standard deductions by filing status are:

Filing Status

2021 Standard Deduction

2022 Standard Deduction

Single

$12,550

$12,950

Head of household

$18,800

$19,400

Married filing jointly or qualifying widow(er) with dependent child

$25,100

$25,900

Married filing separately

$12,550

$12,950

Note: The standard deduction is higher if you are blind or at least 65 years of age.

Residential energy tax credit

Once you’re a homeowner, you have an opportunity to claim a tax credit if you install energy-saving home improvements such as solar panels, wind turbines, or geothermal heat systems. The residential energy tax credit is worth up to 26 percent of the installation cost.

Since this is a tax credit and not a deduction, it’s more valuable. While tax deductions reduce your taxable income, tax credits reduce your taxes dollar for dollar. Anyone who qualifies can take advantage of this tax credit, while the other home deductions we’ve discussed require itemizing your deductions on your income tax return.

Don’t overbuy a house to gain tax benefits for homeowners

No tax deductions justify buying a home significantly outside of your budget. A house is only a good investment if you can comfortably afford each month’s mortgage payments.

Make sure you buy a house you can afford without undue financial stress. Tax breaks aren’t a good reason to purchase a home, especially since most tax advantages are only beneficial if you itemize.

And don’t forget, the home purchase price is only part of it — make sure you also factor in any closing costs, moving expenses, property taxes, insurance, and home maintenance costs.

Consider all the reasons you want to buy a new home before you do it

Buying a home can be a great way to build equity and eventually own a property. Owning your house protects you from certain unpleasant circumstances such as a landlord raising your rent or selling your house out from under you.

Plus, the freedom that comes with homeownership makes any house feel more like a home. Paint that kitchen any color you want — you don’t need a landlord’s permission!

Still, owning a home isn’t all sunshine and rainbows. If a pricey appliance breaks down or your roof needs to be replaced, you’ll be on the hook to cover those costs.

The tax benefits of buying a house help tip the scales toward homeownership if you itemize, and a home is generally a good investment for your future. But ultimately, your unique financial situation will determine if it’s time to buy a house or keep renting.

While buying a home is often a great investment, be sure to consider all the economic and noneconomic reasons you want to buy a house before signing on the dotted line. The choice to purchase a home is one of the most important decisions of your financial life — make sure you know what you’re getting into!

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