Tax Benefits for Home Buyers

Disclosure: The facts provided in this article are for informational purposes only and are deemed accurate at the time it was published. To see the most current rates and information, visit the IRS website and consult a tax expert.

Buying a home is likely your family’s largest purchase. One of the many benefits of purchasing your own home is being able to claim specific tax deductions on your income taxes when you itemize your tax return on Schedule A (Form 1040). Learn more about common homeowner deductions below.

House Payment

Typically, your house payment includes various costs such as your mortgage, mortgage interest, personal mortgage insurance, and real property taxes. Although your mortgage principal amount is nondeductible, the other three items may qualify as tax deductions.

Personal Mortgage Insurance (PMI, also called a Mortgage Insurance Premium or MIP)

Often you can claim your PMI premium payment as an itemized deduction on your tax return if it qualifies and if the mortgage insurance contract originated on January 1, 2007 or later.

Your deduction amount may be reduced or eliminated if your adjusted gross income (AGI) is more than $100,000 or $50,000 if married filing separately, and you cannot deduct your mortgage insurance premium when your AGI is more than $109,000 or $54,500 if married filing separately.

Mortgage Interest

Most homeowners can deduct the mortgage interest portion of their monthly home mortgage payment on their itemized federal tax return, although the deduction may be limited.

Eligibility includes:

• Loan amount must be used to buy, build, or substantially improve the home.
• If the home was purchased before December 15, 2017, you can deduct up to $1 million in debt. If the home was purchased on or after December 15, 2017, you can deduct up to $750,000.
• The loan interest must be for your primary or secondary home loan.

In addition, if you were issued a Mortgage Credit Certificate (MCC) for your mortgage, you may be eligible for a tax credit.

Note:

• Ministry and military homes that receive a nontaxable housing allowance can often still deduct real estate taxes and home mortgage interest. Qualified homeowners do not need to reduce their deductions by the nontaxable allowance. See Pub. 517 and Pub. 3 for more information.

Property Taxes

State and local property taxes are typically deductible up to $10,000 or $5,000 if married filing separately, including the portion of real estate taxes you paid at closing if you purchased your home in the eligible tax year.

Notes:

• If you pay your real property taxes through an escrow account, then you may deduct only the tax amount the lender actually paid from the escrow account to the taxing authority as opposed to the amount you paid to the lender.
• If your taxing authority includes utility and/or service charges to your tax bill, you will need to deduct only the real property tax amount on your tax return.
• Ministry and military homes that receive a nontaxable housing allowance can still deduct real estate taxes and home mortgage interest. Qualified homeowners do not need to reduce their deductions by the nontaxable allowance. See Pub. 517 and Pub. 3 for more information.

Closing Costs

Select closing costs may be tax deductible if you purchased the home in the current tax year.

These items, which should appear on the Settlement Statement, include:

• Loan origination fees, also called points, including points that the seller paid on your behalf. There are requirements for deducting the full amount, such as using the home as your primary residence and seeing the full amount on the Settlement Statement. For a full list of requirements, read Page 5 of the IRS Publication 530.
• Prepaid mortgage interest.
• Prepaid real estate taxes.

Home Improvements for Medical Purposes

Improvements made to your home for medical purchases may be deductible on your taxes if you itemize on Schedule A (Form 1040).

Eligibility includes:

• The expenses add up to more than 7.5% of your AGI.
• If the equipment does not increase the value of your home, they are fully deductible. Examples include ramps, railings and support bars, and modified doorways, stairways, cabinets, fixtures, outlets, and alarms.
• If the equipment does increase the value of your home, you can deduct the difference between the cost of the equipment and the increased value of your home. For example, if a medically necessary infinity pool that costs $10,000 increases your home value by $2,000, so you can deduct the difference ($8,000).
• The expense of operating the new medically required equipment, like electricity and repair costs.

The IRS may ask you to prove that improvements are medically necessary and used for medical purposes.

Homestead

Many tax jurisdictions offer homestead tax deductions on real property taxes for primary residence owners, although the eligibility requirements differ between jurisdictions.

The DC Homestead Deduction can reduce your real property's tax assessed value by $76,350, resulting in real property tax savings of $648.97 per year. This program also caps the annual increases in real property taxes to no more than 10%. There are requirements to qualify for this deduction. Learn more here.

The Maryland Homestead Tax Credit operates as a cap on real property taxes, meaning real property taxes are capped at a 10% assessment increase each year. There are requirements to qualify for this deduction. Learn more here.

Profit From Selling Another Home

Typically, if you made a capital gain on a residence you sold this tax year (in other words, if you made more in the sale than you paid or made more than the basis) and this home was your primary residence for at least two of the past five years, then you can exclude up to $250,000 of the capital gains for a single filer and up to $500,000 as joint-filers.

For assistance determining your basis, consult a tax professional.

Expenses That Are Nondeductible

Home expenses that you typically cannot deduct from your itemized income tax return include:

• Fire, comprehensive, title or homeowner’s insurance premiums
• Payments applied to the mortgage to reduce the principal amount
• Costs and fees associated with the home’s utilities (unless deemed medically necessary)
• Title insurance
• Forfeited deposits
• Depreciation
• Domestic help salary or wages
• Homeowners’ Association Fees

This article is not intended as tax advice. For guidance on your specific tax questions, contact your tax professional.