If you are interested in becoming a homeowner, you may want to know how buying a home will affect your annual taxes. There used to be a lot of talk about homeownership tax deductions, so will your taxes go down after buying a house? Here’s the scoop:
After changes to the U.S. tax code in recent years, there are several homeownership expenses that can be deducted from your yearly taxes. However, most of these deductions are only available if you itemize your tax returns. If you fall into that boat, there are several things you may be able to deduct from year to year to bring down your tax load.
One of the biggest deductions you can claim during your first year of homeownership is for mortgage points. Also known as discount points, each one is equal to 1% of the total mortgage amount and is paid upfront to your lender as a way to “buy down” your mortgage interest rate. For example, paying one point can reduce your rate by roughly 0.25% and two points would bring it down by 0.5% off the market rate. While the points paid can cost you several thousand dollars at the outset of the loan, they can save you a lot of money over the course of the loan. And they can be deducted on your taxes. You can claim the full amount of points you paid in the same year you buy the house as long as your home loan amount was less than $750,000. If you borrowed more than that there is a limit to how much you can claim.
The mortgage interest deduction allows you to claim the total all the interest you paid on your home loan each year. The one stipulation is that you can deduct interest paid on the first $750,000 of the qualifying property. It can be used on either a first or second home as long as it is a personal residence.
Part of being a homeowner is paying property taxes to help with things like upkeep of state and local roads and education. Fortunately, if you itemize, you can deduct a large portion of this expense. For those married and filing jointly, there is a $10,000 maximum deduction for property tax, and a $5,000 max for those single or filing separately.
If you run your business from your home, your home office expenses can be deducted for a tax break. However, this does not apply to remote employees, just self-employed homeowners. The amount you can deduct is calculated in one of two ways. First, you can add up and provide documentation of all the expenses you spend to operate your business from home, including internet costs, utilities, maintenance, etc. Second, you simply deduct $5 per square foot of office space you have. If your home office is a 200 square foot room, you’d be able to qualify for a $1,000 tax deduction.
Anything you do to increase your home’s value are called capital improvements and their cost can be deducted in the year you sell your house. These home improvements incorporate things like adding an addition or a garage, putting in a swimming pool, replacing the roof or central air conditioning system. You will need records of all improvements to claim the deduction whenever you decide to sell.
Depending on your situation, there may be even more tax deductions available to you as a homeowner. Talk to your tax professional for more details.
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These materials are not from HUD or FHA and were not approved by HUD or a government agency. We do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice.