New Homeowners: Here’s What You Need to Know for Your Taxes

Take advantage of first-time homebuyer tax credits.

The tax landscape changes yearly. With this being the first tax year under the changes in the new tax bill, first-time homebuyers must stay on their toes to understand the changes.

The government provides tax breaks for existing and new homeowners to incentivize buying homes. Homeownership offers multiple home tax deductions, tax credits and other breaks that aren’t available to those who rent. If you bought your first home in 2018 — or you’re hoping to buy one in 2019 — it can pay to familiarize yourself with first-time homebuyer tax credits so you can take advantage of tax breaks that lower your tax bill.

Home Mortgage Interest Deduction

The mortgage interest deduction is one of the biggest home tax breaks and shouldn’t be overlooked as a first-time homebuyer credit. This crucial deduction covers interest paid on loans of up to $750,000, or $375,000 if you’re married but filing a separate return.

The deduction can be especially beneficial for borrowers with new loans because interest charges on mortgages are typically steeper in the early years of the mortgage’s term.

“The way loan amortization works, your first payments have the highest ratio of interest to principal,” said Andrew Christakos, an accredited investment fiduciary with Westfield Wealth Management in Westfield, N.J.

You must itemize on Schedule A of your tax return to claim the home mortgage interest deduction. To do so, add up all deductible expenses for the year, including those related to homeownership as well as other categories. Claiming the mortgage interest deduction can save you tax dollars if your itemized deductions are greater than your standard deduction.

Don’t miss this homebuyer tax credit. Your loan provider should send you Form 1098 shortly after the tax year ends. It will show the amount of interest you paid the previous year.

Mortgage Points Deduction

You can also deduct what you pay in points to obtain the mortgage loan in the first place. Mortgage points are prepaid interest that can help a borrower qualify for a lower interest rate over the life of the loan. And, they can qualify for a tax deduction as well.

“Most homeowners overlook the deduction of points they pay to secure a mortgage loan,” said Yvette Best, controller and senior tax accountant at Best Services Unlimited, a tax preparation company based in Fayetteville, Ga. “Buying points to lower the interest rate on your mortgage loan is one of the best tax breaks available right now. The return on investment is twofold because you get to deduct the cost of the points and the amount on interest paid in the same year as the home purchase.”

You must itemize on your return to claim this deduction, and your settlement disclosure statement must specifically cite these fees as “points.” Your home loan must be for $1 million or less, just as with the mortgage interest deduction.

Don’t Miss: 16 Commonly Missed Tax Deductions

Tax-Free IRA Withdrawals

Saving money for a down payment and closing costs is a major consideration for most people when they’re getting ready to buy a home. The IRS says you can pull funds from your IRA to help.

“First-time homebuyers who break into their IRAs to come up with the down payment do not have to pay the 10 percent penalty normally applied to withdrawals taken before age 59 1/2,” said Lisa Greene-Lewis, a certified public accountant and blog editor at TurboTax. “This incentive applies to current homeowners as well because you’re eligible for first-time buyer status if you haven’t owned a home in two years.”

You can take up to $10,000 from your IRA without penalty to buy a home, although you’ll still need to pay taxes on the money. Your 401k plan does not qualify for the exception to the 10 percent penalty.

Learn More: 10 Lessons on 401k Withdrawal Rules and Options

Property Tax Deduction

Property taxes are one of the many lucrative tax breaks for first-time homebuyers. Taxpayers who itemize deductions on Schedule A are also eligible to deduct real estate taxes paid on a primary residence, said Laurie Samay, Director of Financial Planning with Apexium Financial.

This type of tax credit for buying a house works this way: You can deduct property taxes paid during the year for which you’re filing. If you purchase a home midway through the tax year, you can claim all taxes paid from the date of sale onward. However, you’re limited to a total deduction of $10,000 — or $5,000 if married and filing separately — for all state, local and property taxes.

Keep reading to find out what homeowners should know about property taxes.

More on Taxes

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Joel Anderson contributed to the reporting for this article.