Tax Breaks for First Time Home Buyers
Updated: Jan 11
Buying a home can sound like an intimidating undertaking if you’ve never done it before. The thought of relocating and the sheer level of financial investment gives many people anxiety. Luckily, the government wants to make the process easier and less scary, with a range of tax breaks for first time home buyers.
To get the most out of your purchase, don’t settle for the standard deductions and write-offs. Instead, make sure you take advantage of the many tax breaks available to you. So, what exactly is tax deductible when buying a house for the first time?
Mortgage Interest Deductions
Mortgage interest is the second half of your monthly mortgage payment—the rest goes toward the principal balance. Though interest rates are hovering near historic lows, they can still be a financial burden unless you take advantage of the option to deduct mortgage interest on up to $1 million of debt.
Claiming this tax break is easy. Each year, your lender will send you Form 1098 listing the interest you paid during the previous year. Simply enter this number on Form 1040 Schedule A—under itemized deductions—and claim your tax break.
Mortgage Points Deduction
Beyond the typical interest deduction, you’re eligible for a tax break based on mortgage points—prepaid interest that represents 1 percent of your total mortgage. You are allowed to deduct Discount Points, or the fees paid directly to the lender in exchange for a reduced interest rate. This is also called “buying down the rate.”
Mortgage Credit Certificate Program
A tax credit for buying a house is more valuable than a deduction because it cuts back on your taxes owed, dollar-for-dollar. For low-income home buyers, the Mortgage Credit Certificate program gives back 20% to 30% of the interest you pay every year as money back in your pocket.
You will need to qualify for the Mortgage Credit Certificate program before purchasing your home to claim this credit.
Real Estate Taxes
Each year, you can deduct your local property taxes on Form 1040 Schedule A. To find the amount you can deduct, check Form 1098 if you pay through an escrow account or check your records if you pay directly to the municipality.
Additionally, for the first year in your home, you should earn an even bigger tax reduction. If you reimbursed the seller for their prepaid real estate taxes, you can take those as itemized deductions as well.
If increased investment opportunity is one of the reasons for buying a home, then you’ll appreciate this benefit for your IRA. If you pull from your IRA to cover your down payment and other purchasing costs, first time home buyers do not have to pay the $10 penalty fee for early withdrawals.
Additional First Time Home Buyer Advantages
Home Improvements: If you purchase a fixer-upper, all improvements you make to your home from landscaping to new doors and windows can be deducted when you sell your home.Energy Efficiency: Upgrading your home with energy-efficient appliances and home improvements—such as an insulation system—can offer an energy tax credit of up to $500.Home Sale Profit: If you own and live in your home for at least two years before selling, much of the profit you make is tax-free. Up to $250,000 for single returns and up to $500,000 for married, joint returns.Mortgage Insurance Premiums: This tax deduction ended in 2016 but is currently under legislative review for renewal. It offers a write-off for the premium paid if your down payment was less than 20% of the home’s cost.
The First-Time Homebuyer Credit is no longer available. It ended in 2010 and has not been renewed.
Now that you know the many tax breaks for first time home buyers, visit your local real estate agent to learn how to take advantage of all the perks of being a first time home buyer.