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.
Home Enhancement Breaks
Does your home need a little work? This may have some tax benefits if you use a home equity loan from a company like Figure or another loan secured by your mortgage from a company like Unison. 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?