Now that you've made what may be the largest and most significant purchase in your life, you'll be happy to know that there are valuable tax breaks for buying a house.
Tax breaks available to homeowners
Once you purchase your home, you become eligible for a set of tax breaks reserved for homeowners. These federal tax benefits are available to any homeowner, whether you own a single-family home, townhome, condominium, mobile home, or a portion of a cooperative apartment.
To take advantage of these tax breaks, you'll need to prepare an itemized tax return. This means you'll need to keep all receipts for any home-related and deductible purchases and expenditures, and make sure you get paperwork for every donation you make during the year. If you've been filing using a 1040-EZ form, this may seem like a lot of work at first, but you could be rewarded for your efforts when tax time comes around.
How deductions for home-related expenses work
As a homeowner, you may be able to claim several deductions and credits to reduce your final tax bill:
Deductions reduce your adjusted gross income, and thus your overall tax liability.
Credits allow you to deduct some house-related expenses, like energy efficient improvements, to reduce the overall tax amount you owe.
What types of deductions are available to homeowners?
The items that can and cannot be deducted, as well as caps on those deductions and limitations on income, can change from year to year. Be sure to consult with your tax professional.
Mortgage interest: You can deduct interest on a mortgage, plus interest paid on a home equity line of credit (HELOC) as long as you use HELOC funds to update and upgrade the house. Check out this IRS calculator to see which mortgage interest deductions you may be eligible to take.
Mortgage interest points: If you paid your lender mortgage interest points when your home purchase closed or refinanced an existing loan, you could take advantage of a tax deduction. The deduction applies only if you paid the lender for these points. Learn more about deducting points.
Property tax: You may be able to deduct any property taxes you pay starting from the date you purchase the property. Property taxes are levied by most local and state tax authorities based on the assessed value of your home. In some areas, you may also pay a personal property tax. If you pay either type of property tax, check to see if you can claim an income tax deduction.
Private mortgage insurance: Private mortgage insurance (PMI) is an additional line item on your mortgage statement, charged by lenders when your down payment is less than 20%. If your mortgage was issued after 2007, you could claim a tax deduction on your PMI payments. There are income limits on this deduction, so you may not be eligible depending on your salary.
Work-from-home expenses: Whether you work from home full-time or part-time, or operate a side business from your home, you can probably deduct your home office expenses and claim an amount for the actual space used to perform the work. The current tax law will specify the value of the deduction, often based on dollar value per square foot, including any applicable maximums.
What types of credits can I track to lower my tax bill?
Energy credits: While most tax incentives for making energy-efficient upgrades to your home have expired, you can still claim deductions through 2021 for improvements that use solar energy for electricity and water heating equipment. The longer you wait, though, the less money you'll get back. Here's the percentage of solar energy equipment you can deduct, based on when the installation took place:
- Between January 1, 2020, and December 31, 2020 – 26%
- Between January 1, 2021, and December 31, 2012 – 22%
Medical expenses and 'aging in place': You can deduct the costs of updates or special equipment installed for the purposes of medical care for you, your spouse, or a dependent. Deductions are also available if you modify your home to make it easier to live in as you get older.
Common examples include the installation of a wheelchair ramp, grip bars in a shower, or repositioning cabinets for better access. If the improvements increase the value of your home, only part of the costs can be deducted as a medical expense. Learn more about this deduction.
Home sale exemption: If you've lived in your primary residence for two out of the five years before you sell it, you may be able to avoid paying federal taxes on any profits you make on the sale—up to $500,000 if you're married, and up to $250,000 if you're single, as of 2021. Keep in mind you might still pay local taxes.
Takeaway: tax benefits of homeownership
To make sure you can claim all the tax breaks you're eligible for, set up a system to track and itemize every possible deduction throughout the year. You can use a simple spreadsheet or look for an online budget, accounting, or tax program to make the job easier. Your tax accountant—or future self, if you handle your own taxes—will thank you when tax season rolls around.
Disclaimer: Redfin does not provide legal or financial advice. This article is for informational purposes only, and is not a substitute for professional advice from a licensed attorney, accountant, or financial professional.