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5 Tax Breaks for First Time Homebuyers

Ready to jump into homeownership? Is owning a home a financial milestone that you have been dreaming about your entire life?

Many people dream of becoming homeowners. They dream their entire lives of getting the keys to their first home. But it can be overwhelming trying to figure out how to handle all the costs of purchasing a home. Things like,

  • saving up the down payment,
  • handling closing costs, and
  • dealing with the necessary incidental costs of new homeownership that can quickly add up.

Luckily for anyone looking to take the plunge into buying a home, Uncle Sam has several tax breaks in place to help homeownership a reality for first-time homebuyers. These tax breaks may be the motivation you need to achieve your dream of purchasing your first home.

Mortgage Interest Deduction

This can be one of the biggest tax breaks of home ownership. It covers interest on loans up to $1 million or $500,000 for married couples filing separately. This deduction can be even more beneficial for new borrowers because the interest on their mortgage is a lot higher in the earlier years of the loan.

When filing your taxes, your interest amount will be itemized on a Schedule A form. All of your other deductions will be added on this form. This will save you tax dollars if your itemized deductions are higher than your standard deductions. Each year you will receive a 1098 form your loan provider. Be on the lookout for this form so you can claim your interest.

Property Tax Deduction

Another deduction you can put on your Schedule A form is your property tax amount. You can only deduct taxes on your primary residence.

Mortgage Interest Credit

The federal government’s mortgage interest credit is another great way to save money on your tax bill. The mortgage interest deduction lowers your taxable income, while the mortgage interest credit counts directly against your tax bill. In order to see if you qualify for this credit, you will need to fill out the IRS Form 8396.

Let’s say that you owe $500 to the government in taxes and you are approved for a $500 mortgage tax credit. This means your credit would cover your tax bill, and you can do a jig on Tax Day while everyone else is paying their taxes.

In order to qualify, you would receive a Mortgage Credit Certificate at the time of purchase. This certificate will tell you how much interest you can claim for a credit. Unfortunately, you cannot claim the mortgage interest deduction and mortgage interest credit at the same time. Consider working with a CPA to evaluate which would be the best option and save you the most money.

Tax Breaks for First Time Homebuyers

Home Enhancement Breaks

Does your home need a little work? This may have some tax benefits if you use a home equity loan or another loan secured by your mortgage. Your home improvement amount will qualify as a mortgage interest deduction.

Your home improvements could also have a big benefit when selling your home. If your house sells for more than you bought it for, the additional amount you receive can incur a capital gains tax. But your improvements can lower your taxes and tax basis, saving you money.

Energy Tax Credit

Being environmentally conscious is the way of the future, it seems. The government will even reward you for being saving energy through the energy tax credit. This energy tax credit covers 30% of the cost (with no upper limit) of an energy-efficient appliance or product for your home. This credit is only available for purchases made in 2017. ENERGY STAR is the recommended company to use. They have over 70 categories of products to choose from.

Not only will energy efficiency save you money on your tax bill but it will help with your energy bill over time.

The Bottom Line

There are many tax benefits to homeownership. Purchasing a home is a big decision and you need to understand everything that comes along with owning a home, good and bad. Be sure not to let the tax “tail wag the dog” though: these tax breaks are here if and when you need them. Don't allow them to push you into a decision you wouldn't make otherwise.

Are you a first-time home buyer? Which of these tax breaks will you be taking advantage of?

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Last Edited: August 19, 2017 @ 6:35 pm
About Ashley Chorpenning

Ashley Chorpenning is a Finance Blogger. She has a deep passion for helping millennials gain financial literacy and planning for their futures. Check her out at moneygravity.net!

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  1. Steve Methiew says:

    I have found nice conversation here . Thanks for this information you have shared for us.

  2. Thaddeus says:

    We’re a gaggle of volunteers and starting a new
    scheme in our community. Your site provided us with helpful information to work
    on. You’ve performed an impressive process and our whole group
    can be grateful to you.

  3. Well said with those information and very helpful for those first time home buyers.

  4. Bob Willis says:

    Highly energetic blog, I liked that a lot. Thanks for sharing!

    • ASHLEY CHORPENNING says:

      Thank you Bob! Glad you enjoyed it. Did you find the information helpful for your own home purchase?

  5. Gurneet Kaur says:

    I am a first time home buyer, what forms do I need to fill to apply for these credits?

    • ASHLEY CHORPENNING says:

      Hi Gurneet! Your best resource will be your CPA. When filing your taxes you can apply for some of these credits. Reach out to a tax professional to help you determine what you may qualify for.

  6. I bought my home in August of 2017, put half down and financed the rest through an individual. ( my realtor because I know him personally). Will I still get a tax deduction even though I purchased so late in the year? And with trump president now, is there even a first time home buyer tax deduction anymore?

    • ASHLEY CHORPENNING says:

      The new tax bill will only affect homebuyers who purchased their homes after December 15th 2017. Everyone who has purchased their home before then may continue to deduct up to $1 million on the interest of the mortgage debt ($500,000 for married couples filing separately). The best bet is to work with a tax professional to help you navigate the new tax bill.

  7. Edwin | Cash The Checks says:

    It’s so expensive to buy a house, but yet so worth it in the long run. It feels good to put money toward something that builds equity, unlike most things we buy.

    • Great point Edwin! Thank you for sharing.

      • Ashley,
        Do you know of any tax credits, breaks or deductions for those who buy their home in cash?

        • There are no tax deductions, however; you could save yourself from paying interest on your mortgage. This could be a huge benefit to your financial future. Imagine if you didn’t have to pay rent or your mortgage every month. That money could be earning compound interest in your retirement accounts. Keep in mind you will still have to pay property tax.

          For example say your mortgage would be $1000 a month and you choose to put that into your 401k or IRA instead (there are limits on IRA contributions and 401ks). After 30 years with 7% interest that will yield about $1.133 million. Wouldn’t that be nice to have instead of paying off your mortgage?