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

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First-time homeowners are often nervous about all the new reporting they have to do during tax season. Instead of fretting, turn your anxiety into curiosity because there are many deductions and tax breaks to be had by first-time homebuyers.

Read: The Best Place To Buy a Home in Every State

Think about these options and see if any align with your housing and financial situation. There could be deductions and breaks here that you’ve never even considered.

Who Qualifies as a First-Time Buyer for First-Time Homebuyer Tax Credits?

The U.S. Department of Housing and Urban Development has specific criteria that define what it means to be a first-time homebuyer:

    • You’ve not owned a home within the past three years.
    • You’ve owned a home within the past three years but your spouse has not — or vice versa.
    • You’re a single parent or displaced homemaker who has only owned a home with a former spouse while you were married.
    • You’ve owned a primary residence, such as a manufactured home, that was not constructed on a permanent foundation.
    • You’ve owned a home that failed to meet building codes and can’t bring the property up to code for less than it would cost to build a home.

As you can see, there are many ways to qualify as a first-time homebuyer under HUD, even if you previously owned a primary residence.

Find Out: The New Rules for Claiming Your Boyfriend or Girlfriend on Your Taxes

What Tax Credits Are Available To a First-Time Homebuyer?

The first-time homebuyer tax credit created under President Barack Obama’s administration has been discontinued, but first-time buyers can still benefit from a number of other programs. These include state and local tax credits in some cases.

Federal Government Assistance

HUD offers grants, albeit not directly to consumers. The money goes to state and local governments, and those entities grant you the funds. An important fact to remember is that you must actually qualify for a mortgage first and you will never receive 100% funding for your new home.

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Get Equipped: What Is a Tax Deduction?

State and Local Programs

Although a direct federal tax credit isn’t available anymore, tax credit opportunities do exist on the state and local levels.

State housing finance agencies distribute tax credits through programs like the Mortgage Tax Credit Certificate, or MCC, program. The program makes homeownership more affordable for buyers of modest means and first-time buyers by reducing the mortgage interest due on their loans.

To see if your specific state has other first-time homebuyer programs, visit your state’s .gov website.

Depending on your local county or municipality, there might be specific financial criteria you must meet to be eligible. For instance, Baltimore County, Maryland’s Homeowner’s Tax Credit Program has an annual household income cap of $60,000, and recipients’ assets — not counting the property that the tax credits are for or some retirement accounts — can’t exceed $200,000.

Fannie Mae HomePath Ready Buyer

Fannie Mae launched a program for first-time homebuyers in 2015. It’s called HomePath Ready Buyer, and it’s an online course that educates you about buying a home. Upon completing the program you can receive up to 3% of the purchase price in closing cost assistance.

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 individual retirement account to put toward your purchase.

“First-time homebuyers who break into their IRAs to come up with the down payment do not have to pay the 10% penalty normally applied to withdrawals taken before age 59 1/2,” said Lisa Greene-Lewis, a certified public accountant and blog editor at TurboTax.

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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 401(k) plan does not qualify for the exception to the 10% penalty.

Learn More: Lessons on 401(k) Withdrawal Rules and Options

Other Programs

Federal loan programs can be especially helpful for first-time homebuyers even though the programs aren’t exclusively for first-timers. The U.S. Department of Veterans Affairs, for example, guarantees low and no down payment mortgage loans for qualified veterans. The U.S. Department of Agriculture guarantees loans for low- and moderate-income buyers who purchase a home in a rural area. And the Federal Housing Administration insures loans with low down payment requirements for qualified buyers with modest incomes.

Tax Benefits for All Homebuyers

You might be entitled to any number of tax deductions related to your new home. These benefits vary according to factors like your mortgage loan amount and whether you itemize deductions.

Home Mortgage Interest Deduction

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 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, New Jersey.

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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.

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.

Points or Loan Origination Fees Deduction

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. Origination fees are also deductible if they consist of points or other interest charges rather than administrative costs.

“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, Georgia. “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 $750,000 or less — $1 million or less if the lender originated your mortgage before Dec. 15, 2017 — to qualify.

Don’t Miss: Commonly Missed Tax Deductions

SALT Deduction

The state and local tax (SALT) deduction allows state and local taxes, including school tax, to be deducted on your federal tax return. This serves as an incentive for homeownership and prevents people from having their income taxed twice.

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Property Tax Deductions

Property tax deductions are perhaps the most lucrative of the SALT deductions, and they’re often the most significant deduction overall for taxpayers earning less than $50,000 a year. Taxpayers who itemize deductions on Schedule A are eligible to deduct real estate taxes paid on a primary residence, said Laurie Samay, director of financial planning with Apexium Financial.

You deduct property taxes paid during the year for which you’re filing, but you’re limited to a total deduction of $10,000 — $5,000 if married and filing separately — for all state, local and property taxes.

Keep Reading: Things Every Homeowner Should Know About Property Taxes

Residential Energy Credit

Going green could earn you government tax benefits. The residential energy-efficient property tax credit is for anyone who made qualifying alterations to their primary residence to save on energy. The qualifying installations include solar water heaters, small wind turbines, heat pumps and fuel cells.

Homeowners who installed qualifying equipment other than fuel cells between Dec. 31, 2016, and Jan. 1, 2020, receive a tax credit equaling 30% of the cost. The credit for fuel cells varies according to the system’s power capacity.

Keep in Mind: Tax Loopholes That Could Save You Thousands

Claiming Your Homeowners’ Tax Credits and Deductions

There are many ways to save this upcoming tax season, whether you’re a first-time homebuyer or a long-time homeowner. The key is to check your local and state websites to see what is available to you. Your alternative energy sources, military status or rural property are also key. The most important piece of information to remember is that homeownership can come with tax assistance — you just have to do your research to find the savings.

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Last updated: April 13, 2021


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