Outlined below are several tax benefits that are available to homebuyers. However, the ability to take advantage of each of these may depend on each individual taxpayer’s financial circumstances, therefore it is always wise to consult a CPA or tax preparer about the potential benefits for your personal situation. For example, many of these benefits are only available to taxpayers who itemize their deductions rather than taking the standard deduction. If the itemized deductions, which include mortgage interest and real estate taxes, do not exceed what your standard itemized deduction would be, then any potential benefits may not apply.
Common Tax Benefits of Purchasing a Home
The most common tax benefits of purchasing a home are:
Mortgage interest – Interest on the mortgage used to purchase a home can provide significant tax savings, particularly in the early years of the mortgage. That is because each mortgage payment includes a split between the amount that will be applied to principal and the amount applied to interest. The amount attributable to the interest, the tax deductible portion, is highest in the beginning of the mortgage term and declines over time as more of the payment goes to principal in later years.
Real Estate taxes – the amount paid for real estate taxes on both a primary and secondary home may also be deducted for tax purposes for individuals who itemize their deductions.
Private mortgage insurance (PMI) – When buying a home with less than 20% down payment, many homebuyers will pay monthly PMI. This is a temporary tax break initiated in 2007, which must be renewed by Congress annually. The tax deduction was extended for the years 2015 and 2016. It allows for mortgage insurance premiums to be deducted, subject to certain income limitations.
Upfront points – When you take out a mortgage, you may pay “points” to reduce your interest rate. At the end of the year you will receive a statement, Form 1098, which shows both the interest and any points paid on your mortgage. Whether or not they are deductible, and the timing of when they are deductible depends on a few things. Generally, in order to be deductible upfront in the year paid they must:
- Relate to a loan used for the purchase or construction of a home that is your primary residence;
- Be consistent in nature and amount with what is typical for your market;
- The amount paid for points must be clearly shown as points on your closing statement and cannot be for the reduction of other costs such as appraisals, title fees, etc.
As this is one of the more complicated deductions, it is advisable to consult a tax consultant to determine when and if points are deductible, as there are other limiting circumstances which may apply to your particular mortgage. They are also available on second homes and refinances, but typically must be deducted over a period of time and not upfront.
Home Energy Tax Credit – The Residential Energy Efficient Property Credit is still in effect for taxpayers through December 31, 2016. This is different than a deduction in that it is a dollar for dollar deduction of taxes owed and if your available credit is more than what you owe, it can be carried over to the following year. The credit applies to the cost of installing certain renewable energy sources in your home, such as solar panels and solar water heaters. It may be up to 30% of the cost of such items including installations. You must own the home, but it is not restricted to just a primary residences and there are no limits to the amount of credit for most qualifying items.
Knowing about these tax benefits and how they affect you can help you to determine whether it is a wise financial decision to purchase a home rather than rent. With interest rates continuing at historically low levels, many homebuyers are finding that purchasing a home is their best option.
Marimark Mortgage is a mortgage broker serving all of Florida, Virginia, and Pennsylvania.
As a mortgage originator, we specialize in conventional home mortgages, FHA, VA and USDA mortgage options, refinance loans, and reverse mortgages. We’ve also worked extensively with a variety of refinancing options to help clients lower their payments on their home.