Mortgage Advice

The Tax Benefits of Buying a Home

March 28, 2017

It’s that time of year again: tax season. Filing taxes properly can be a confusing feat, which is why we’re here to help. If you want to pay lower taxes and put extra cash into your bank account this year, paying special attention to your real estate-related tax deductions at the time of filing is important.

Whether this is your first tax season as a homeowner, or you’re a seasoned pro, here’s what you need to know to get the most money back on your tax return.

Mortgage interest deduction
For most homeowners, mortgage interest generates the biggest tax break. The mortgage interest deduction lets homeowners lower their annual taxable income by the amount of interest paid on their mortgage loan. Take note, first-time homeowners: Deducting mortgage interest at tax time is extremely beneficial to you, since your monthly mortgage payment is primarily made up of interest to begin with.

At the time of filing, you’ll want to have a copy of your 1098 form, which indicates the amount of interest paid within the last year. You can write off the amount of interest you paid on your mortgage in the form of a deduction. Keep in mind that you can only deduct mortgage interest on a loan valued at $1,000,000 or under.

Property tax deduction
Property tax deductions are usually the second largest real estate-related tax break you’ll receive. Both summer and winter property taxes can be claimed when you’re filing your taxes, and they are 100% deductible. This results in paying less in income taxes and potentially getting a bigger return from the IRS. You can find the values of your property tax deductions on Schedule A on the 1040 form. 

PMI deduction
If you bought a house with less than 20 percent down, chances are you had to pay private mortgage insurance (PMI), which protects the mortgage lender if you cannot repay the loan. If you purchased a home during and after 2007, you can deduct PMI on your taxes. Contact your tax professional to learn the ins and outs of this deduction.

Discount points deduction
Some homeowners pay discount points on their loan to lower the interest rate. This is a qualifying real estate tax deduction and the amount can be found on your 1098 form. If the points were prepaid at closing, they must be deducted in the year they were paid. If the points were financed and rolled into the mortgage loan, the deduction is spread out each tax season over the loan’s lifespan.

Home office deduction
If you’re a homeowner who works from home, you can deduct your home office costs on your taxes, which is seen as a work expense. You can also deduct business expenses like electricity, water and internet services from your taxes if you work from home. To properly calculate your deduction, you will need to know how much space your home office takes up in your house, as well as how much you spend each year on qualifying home office expenses.

Let’s say you spend $3,000 on eligible expenses and your office takes up 100-square-feet in your 2,000-square-foot home. At the time of filing, you can deduct $150 from your taxes.

If you’re a homeowner, check with a certified tax professional to see which deductions and credits you qualify for so you can pay lower taxes this year and save money in the process. Send us a message if you’d like us to put you in touch with one of our trusted industry partners.