Tax Benefits of Home Purchase, Ownership, and Sale

A house is often one of the most expensive things a person will ever buy. With a traditional mortgage, a payment that includes interest, property taxes, and homeowners insurance can last for 30 years.

How tax breaks for homeowners work

Different types of tax breaks come with owning homework in different ways. Tax benefits often come in the form of deductions. You can subtract the amount allowed from your taxable income for a deduction, which lowers your tax bill.

Tax breaks for people who buy a home

You can start getting tax breaks as soon as you buy the home. Here are some common tax breaks that homeowners often get.

Costs Taken Off at Closing

When you buy a home for the first time, you have to pay several closing costs, most of which aren't tax-deductible, like a down payment. But if you pay with discount points, you can take those points off.

Discount points are prepaid interest that lowers your long-term interest rate. They can be deducted over the life of the loan, or if you meet certain requirements, you can deduct them all in the year you pay them.

Tax breaks for homeowners

You can use other tax credits or deductions when you own a home. When you own a home, the tax benefits you get depend on how much interest and mortgage insurance you owe on your loan, among other things.

Keep in mind that you can't usually deduct things like insurance (other than mortgage insurance), paying domestic help, utility bills, depreciation, or homeowners association fees.

Deduction for mortgage interest

When you have a mortgage, you can deduct interest payments up to a certain limit. Each year, if your interest costs were more than $600, your bank will send you a Form 1098 that shows how much of your payments went toward interest. This can help you when you list your deductions.

Tax breaks for mortgage interest

People can only get the mortgage interest tax credit if their state or local government gives them a qualified Mortgage Credit Certificate (MCC). On Form 8396.7, you can claim mortgage interest.

This benefit is made for people with less money. As a tax credit, it gives you a dollar-for-dollar tax break instead of lowering your taxable income, which is what a deduction does.

Tax Breaks for State and Local

State and local real estate taxes are another tax break for people who own their homes. This lets you pay less in federal taxes by deducting the amount you spent on qualifying state and local taxes, such as some real estate-related taxes.

Imputations of rent are not taxed.

People who own their homes don't have to pay rent. Imputed rent, also called "return on homeownership," helps homeowners save money on taxes because returns are not counted as taxable income. On the other hand, landlords have to pay taxes on the rent they get, and renters can't deduct the cost of their rent from their taxes.

Credit for energy use in homes

Homeowners can get a tax credit for making improvements to their homes approved by the IRS and using renewable energy. This credit is usually worth 26% of the cost of adding solar electricity, water heaters, small wind energy properties, geothermal heat pumps, and biomass fuel.

There are tax breaks for selling a home.

One of the best things about owning a home is that you can sell it for a profit. Usually, you have to pay taxes on capital gains, which are profits from investments. However, your main home is an exception to this rule.

What do I need to do for my taxes when I buy a house?

After you buy a house, your lender will give you a Form 1098. This is an important document to have when you do your taxes. This form will list tax payments, mortgage insurance premiums, and interest that you can deduct. Most accountants and tax software can help you figure out how to file your taxes based on your situation.

When you buy a house, do you have to pay sales tax?

A house doesn't have a traditional sales tax. Instead, depending on where you live, you may have to pay other local and state property taxes. Taxes on a home are often included in a mortgage payment.