The only tax deductions on buying a home that you can qualify for are prepaid mortgage interest (points). Next, we'll describe the closing costs you can deduct when buying a home, as well as any special considerations that may affect the amount you can deduct or in which tax year you can claim the deduction. State and local real estate taxes (property taxes) are deductible in the year you pay them. You can only deduct property taxes that apply at a similar rate on all real estate in your area to benefit general welfare.
You can even deduct points if the seller pays them, as long as you meet the above conditions. However, when you sell your home, you'll need to remember to lower the value of the purchase price at any point the seller has paid. You'll likely achieve the biggest tax savings if you deduct all your points in the year you pay them, if you're eligible to do so. Your other option is to deduct points during the life of your mortgage.
IRS Classifies Mortgage Origination Fees as Points. You can deduct opening fees on your loan, even if the seller pays them. These are the fees lenders charge for underwriting and processing your mortgage. If you applied for a mortgage (loan) to finance your home purchase, you may need to make monthly home payments.
Paying for your home can include several costs of owning a home. The only costs you can deduct are state and local real estate taxes that are actually paid to the taxing authority and interest that qualifies as home mortgage interest and mortgage insurance premiums. These are discussed in more detail below. If you refinance a mortgage, the limit depends on the origination date of the previous loan.
Your home equity loan or HELOC debt counts toward your total mortgage debt limit to deduct interest. Therefore, if your first mortgage exceeds the deductible limit, the loan interest on the home equity will not be deductible. If you are within the limit to deduct all of your mortgage interest, you can also deduct the discount points you paid when the mortgage was closed. Some homeowners buy discount points to lower the mortgage interest rate.
A discount point costs 1% of the mortgage amount. Term points can be confusing because some lenders call their charges loan origination points. These points are used to pay lenders' costs of granting the loan, and are not tax-deductible. Only discount points paid to lower the interest rate can be deducted.
You can deduct home office expenses if you are self-employed and use part of your household regularly and exclusively for your business. You can use the IRS simplified method or your actual expenses to calculate the amount of the deduction for home office expenses. The IRS website provides details on how to determine if your home office qualifies for a tax deduction and has worksheets for calculating the amount of the deduction. When calculating your deductions for medical expenses, you can include the cost of installing medical care equipment or other medically necessary home improvements that benefit you, your spouse, or a dependent.
The cost of mortgage insurance is currently deductible. The deduction includes the amount paid for private mortgage insurance for conventional loans and mortgage insurance for FHA loans. It also includes the guarantee fee for USDA mortgage loans and the VA financing fee for VA mortgages. Amount You Paid for Mortgage Insurance Treated as Mortgage Interest, IRS Says.
What happens if you rent a part of your house, such as a room or the basement? You'll need to pay taxes on your rental income, but you can deduct rental space expenses. Potentially deductible expenses include insurance costs, general repair and maintenance, real estate taxes, utilities, supplies and more. You can also deduct depreciation for the portion of your home used for rental purposes and for any furniture or equipment in the rented space. You also don't have to itemize to deduct rental space expenses in Annex A.
Instead, you claim them on Schedule E (Form 1040) and subtract them from your rental income. Debt insured by your primary home that you used to refinance a mortgage you contracted to purchase, build, or substantially improve your main home also counts, but only up to the amount of the previous mortgage principal just before refinancing. So, without further ado, here are 13 tax breaks that can help you buy a home and thrive as a homeowner. For mortgage interest to be deductible, the mortgage must be insured by your home and the proceeds must be used to build, purchase, or substantially improve your primary residence or second home.
Deductible sales taxes may include sales taxes paid for your home (including mobile and manufactured goods) or home construction materials if the tax rate was the same as the general sales tax rate. You can generally treat interest on a loan that you have taken out to purchase shares in a cooperative housing corporation as mortgage interest if you own a cooperative apartment, and the cooperative housing corporation meets the conditions described above in Special Rules for Cooperatives. Based on the Actual Expense Method, you basically multiply the operating expenses of your home by the percentage of your home dedicated to commercial use. If someone gave you their home after 1976 and the donor's adjusted base, when they gave it to them, was equal to or less than the FMV, your base at the time of receipt is the same as the donor's adjusted base, plus the portion of any federal gift tax paid that is due to the net increase in home value.
No matter when the debt was incurred, you can no longer deduct interest on a loan secured by your home to the extent that the proceeds from the loan have not been used to purchase, build, or substantially improve your home. Homeownership debt is a mortgage that you took out after October 13, 1987 to purchase, build, or substantially improve a qualifying home. Luckily, Uncle Sam has some tax tricks up his sleeve to help him buy a home, save on home-related costs, and sell his house tax-free. If you have an IRA or 401 (k) account, you may be able to take advantage of those funds to help you buy a home.
Buying your first home is a big step, but the tax deductions available to you as a homeowner can lower your tax bill. . .