Owning a home is a big financial burden, but it can also provide you with several tax benefits, which can help your finances. If you can lower your tax liability just by owning a home, it may be an investment worth making.
Keep reading to learn the tax benefits for new homeowners to see if you may benefit.
Perhaps the largest tax deduction you can take as a homeowner is the mortgage interest you pay. As a new homeowner, you pay a lot of interest during the first couple of years that you own the home. Luckily, you can write that interest off on your taxes. This only pertains to owner-occupied homes or second homes. You cannot deduct the interest you pay on a loan on an investment property. New this year, though, you can only deduct interest on the first $750,000 you have in mortgages. If you have a mortgage larger than this amount, you can’t deduct that portion of interest.
You will receive IRS Form 1098 from your mortgage lender at tax time. This form will show you how much interest you paid for the year. This is the number you’ll use on your taxes should you decide to write off the interest you pay.
Mortgage Points Paid
If you paid points on your mortgage, you may be able to write them off on your taxes. Points are really prepaid interest on a loan. You pay the lender the interest upfront and in exchange, they give you a lower interest rate or charge less closing fees.
While paying 1% to 2% of your loan amount can be quite sobering, it can help you get the lower interest that you need. Before you decide to pay points, make sure that it makes financial sense. Will you save much more than the 1% or 2% that you pay in points over the life of the loan? If so, it could be well worth it. The fact that you can write these points off on your taxes also helps. This deduction only applies to your primary residence. The amount you pay must also be typical for the area. For example, you can’t pay 5 points and expect to write them off unless that is normal practice for your area.
Real Estate Taxes
When you own a home, you are responsible for the real estate taxes on the property. You may only deduct the amount that you actually paid to the county, though. If you have an escrow account set up, you can’t write off the money you put into the escrow account to cover future payments.
You can use your county’s tax bill to help you know how much you can deduct on your taxes. You can write off all taxes you paid at the closing or throughout the year as you owned the home. You just need proof from the county that you paid them in full and you can write off the full amount of the taxes.
Energy Efficient Changes
Did you make energy efficient changes to your new home? You may be able to deduct the cost of those changes on your taxes. You may be able to deduct up to 30% of the cost of the renovations made. Typically, you can only deduct the cost of solar panels and solar powered water heaters on your tax returns. In order to claim the deduction, the energy efficient changes must produce half of the home’s energy from solar power.
As a new homeowner, you have a variety of tax deductions you can take. Talk with your tax advisor to see if you qualify for these deductions. As of 2018, the standard deduction amount changes dramatically, which may decrease the number of homeowners that actually itemize their deductions. In order to take any of the deductions discussed above, you must itemize your tax deductions. Your tax professional can let you know which way would leave you with the lowest tax liability.Click to See the Latest Mortgage Rates»