After signing scary looking legal documents and writing many very large checks, it’s nice to know there are some tax savings at the end of the home-buying tunnel. There are many home-related tax benefits and they available for most types of homes: Condos, co-ops, single family homes, apartments or townhouses, mobile homes and even second homes.
The key to understanding if you will benefit from the tax advantages of home-ownership is to compare your potential itemized deductions (the home-related stuff) to your standard deduction. From there, figuring out when to itemize instead of using the standard deduction is pretty straightforward.
Whenever your itemized deductions exceed your standard deduction you should itemize. The standard deduction is the amount the government lets anyone deduct from their income, based on their filing status ($5,950 for taxpayers who are single or married but filing separately, $8,700 for heads of households and $11,900 for married couples who file joint returns).
So if you are single and your itemized deductions exceed $5,950 you will save money (pay less taxes) by itemizing.
What Can I Deduct?
Mortgage Interest Tax Deduction
The biggest home-related tax break is the mortgage interest tax deduction. Unless your mortgage is for more than $1 million, all of the interest you pay on your loan is deductible from your taxes.
This means that if in the first year of owning your home, your interest payments on your mortgage total $10,000, you would then be able to subtract $10,000 from your adjusted gross income for that year. Then, depending on what marginal tax bracket you are in, you can determine your savings. For those in the 15 percent bracket, this would mean an effective tax break of $1,500 (because you would have paid $1,500 more in taxes without the mortgage interest tax deduction).
A second important deduction you can make are property taxes. When you look at the breakdown of your monthly loan payments on our tool at SmartAsset.com, you will notice that a big part of the monthly payment goes towards paying property taxes.
Points are generally used to get a slightly better interest rate on a loan. For a quick refresher on points, and when to buy them, check out the SmartAsset What is a Mortgage blog. The IRS allows you deduct this expense in the year that it is incurred, as long as you meet a few requirements: Your loan must be for the purchase of your main home, the payment of points has to be a standard business practice in your area and the points have to fall within an established range.
Mortgage Insurance Premiums
In some cases, mortgage insurance premium payments can be deducted if you itemize, as long as the mortgage insurance is provided by the Department of Veterans Affairs (VA), the Federal Housing Administration (FHA), the Rural Housing Service (Rural Housing) or private mortgage insurers in connection with a mortgage for the purchase of your main home.
However, if your adjusted gross income is more than $100,000, or $50,000 if you are married and filing separately, the amount you can deduct will be limited. You won’t be able to make any deductions if your adjusted gross income is greater than $109,000, or $54,500 if you are married and filing separately.
A Few Things You Can’t Deduct
While all this savings might make you feel a little giddy, don’t get too excited. There are limits to the deductions you can make, and there are a few things for which you will have to bear the full cost.
Property hazard insurance premiums are also expenses you won’t be able to deduct, even though coverage may be required by your home loan. A few other residential expenses you won’t be able to deduct include homeowners association dues, any additional principal payments, depreciation of your home or and general closing costs and local assessments to increase the value of your neighborhood.