Homeownership comes with many financial perks like building equity and enjoying the predictability of a relatively stable monthly payment. And, if you itemize your taxes, you may qualify for substantially more deductions for mortgage interest, mortgage insurance, and more. Between local and Internal Revenue Service (IRS) tax regulations, homeownership-related taxes are in a constant state of change. But the benefits of staying up-to-date can pay big. Here are some of the many possible deductions you could take advantage of once you own a home.
How Owning a Home Affects Your Taxes
Real Estate Taxes
Homeownership comes with many financial perks like building equity and enjoying the predictability of a relatively stable monthly payment. And, if you itemize your taxes, you may qualify for substantially more deductions for mortgage interest, mortgage insurance, and more. Between local and Internal Revenue Service (IRS) tax regulations, homeownership-related taxes are in a constant state of change. But the benefits of staying up-to-date can pay big. Here are some of the many possible deductions you could take advantage of once you own a home.
Mortgage Interest
In the vast majority of cases, you’ll be able to deduct home mortgage interest on your tax return up to a certain amount. Note that the mortgage must be secured by your personal home—not an investment property.1 Taking advantage of this deduction early in the home taking advantage of this deduction early on is ideal since most people tend to pay more in interest at the beginning of the loan’s lifecycle
Points
There are two different types of points you may pay when purchasing a home:
• Origination points: Typically income for the lender— essentially, the “cost of doing business.”
• Discount points: A type of prepaid interest that can lower your interest rate. These are most beneficial if you plan to stay in your home for a long time.
Points are tax-deductible if they meet the criteria outlined by the IRS. If you itemize the year that you receive your home loan, you can deduct the total number of points that year or extend the deduction over the life of the loan.1 Even if the seller offers to pay points on your behalf, they’re still deductible if they meet IRS criteria.1
Mortgage Insurance
If you put down less than 20 percent on your loan and pay Private Mortgage Insurance (PMI), you may be able to deduct this from your taxes if your income is under a certain amount. Mortgage insurance provided by the Veterans Administration, Federal Housing Administration, or Rural Housing Administration also qualifies for this deduction.1
Energy Efficiency
Certain energy-conserving home improvements may qualify for tax credits or similar benefits. While the qualifying improvements vary depending on the tax year, in the past, they have included solar electric property, geothermal heat pumps, small wind turbines, and more.2 It’s also worth looking into what state and local government incentives are available for energy improvements.3
How Do I Know What I Qualify for?
The good news? As a homeowner, you’ll have more tax deductions at your disposal.
The not-as-good news? It makes your taxes more complicated. Itemized deductions aren’t right for everyone and tax law changes regularly.
Consult a financial professional who can help you determine how to approach your taxes after buying a home
Sources
1. “Publication 530 (2020), Tax Information for Homeowners.” Internal Revenue Service, 2021. February 17. https://www.irs.gov/publications/p936.
2. “Energy Incentives for Individuals: Residential Property Updated Questions and Answers.” Internal Revenue Service, 2021. May 4. https://www.irs.gov/newsroom/energy-incentives-for-individuals-residential-property-updated-questions-and-answers.
3. “State and Local Incentives.” Office of Energy Efficiency and Renewable Energy. https://www.energy.gov/eere/buildings/state-and-local-incentives
