NOV 05, 2024
Buying your first home is a major milestone, and it brings with it some exciting financial perks, especially when it comes to tax deductions. If you’re a first-time homebuyer, you may not be fully aware of all the tax benefits available to you. These deductions can help reduce your overall tax burden and save you money. Here’s a breakdown of common tax deductions that many first-time homebuyers might overlook.
One of the most significant tax benefits for homeowners is the mortgage interest deduction. If you have a mortgage on your home, you can deduct the interest paid on loans up to $750,000 ($375,000 if married filing separately). For many first-time buyers, this is a huge benefit, as the interest portion of mortgage payments is typically higher during the early years of homeownership.
As a homeowner, you’re likely paying property taxes to your local government. Fortunately, you can deduct up to $10,000 in state and local taxes, including property taxes, on your federal tax return. This is particularly beneficial for homeowners in high-tax states like New York or California, where property taxes can be significant.
If you paid for mortgage points (also called discount points) to lower your interest rate when you secured your mortgage, you may be eligible to deduct those costs. Mortgage points are considered prepaid interest, and you can deduct them in the year they were paid if they meet IRS criteria.
First-time buyers who put down less than 20% on their home often have to pay private mortgage insurance (PMI). The good news is that PMI payments may be tax-deductible, subject to income limitations. If your income is less than $100,000 (or $50,000 if married filing separately), you can deduct the full amount of your PMI payments.
Did you make any energy-efficient upgrades to your home? If so, you might qualify for energy-related tax credits, such as the Residential Energy Efficient Property Credit. This can apply to things like installing solar panels, energy-efficient windows, or new HVAC systems. Depending on the upgrade, you could get a credit worth up to 26% of the cost.
If you’re one of the many people working from home, you may be able to claim a home office deduction. This deduction allows you to write off a portion of your mortgage, utilities, and other home expenses if you use part of your home regularly and exclusively for business purposes.
While the moving expense deduction was mostly eliminated for most taxpayers in recent years, there is an exception for members of the Armed Forces who move due to a military order. If this applies to you, you may be able to deduct your moving costs, such as transportation and storage of household goods.
If you took out a home equity loan or line of credit to make improvements on your home, the interest on those loans may be deductible. However, the loan must have been used to "buy, build, or substantially improve" your home. If the loan was used for personal expenses (like paying off credit card debt), it’s not eligible for a deduction.
While this isn’t immediately useful for first-time homebuyers, it’s worth noting for the future. When you eventually sell your home, you can exclude up to $250,000 of the capital gains from your taxable income ($500,000 for married couples). This is a significant benefit when it comes time to sell, as long as you’ve lived in the home for at least two of the last five years.
Buying a home brings numerous tax benefits that can save you thousands of dollars. From deducting mortgage interest and property taxes to taking advantage of energy-efficiency credits, first-time buyers should be aware of all the opportunities available to reduce their tax burden. Always consult with a tax professional to ensure you’re taking full advantage of these benefits and to navigate any complexities that come with your specific situation.
Disclaimer: This content is meant for informational purposes only and is not intended to be construed as financial, tax, legal, or insurance advice.
