How Do Taxes Change When You Buy a House?

Purchasing a home is a significant financial milestone that comes with various tax implications. Understanding how taxes change when you buy a house can help you plan effectively and maximize your savings.

Tax Deductions for Homeowners

Homeownership offers several tax deductions that can reduce your taxable income and lower your tax liability. These deductions include:

1. Mortgage Interest Deduction:

  • You can deduct interest paid on up to $750,000 of mortgage debt for a primary residence or $375,000 if married filing separately.
  • The deduction is available for both conventional and government-backed loans.

2. Mortgage Points Deduction:

  • Points are fees paid to the lender to lower your interest rate.
  • You can deduct points paid in the year you purchase your home or refinance your mortgage.

3. Private Mortgage Insurance (PMI) Deduction:

  • PMI is a type of insurance that protects the lender if you default on your mortgage.
  • You can deduct PMI premiums if you meet certain income requirements.

4. State and Local Taxes (SALT) Deduction:

  • You can deduct state and local income, sales, and property taxes.
  • The deduction is capped at $10,000 for individuals and $5,000 for married couples filing separately.

Itemizing Deductions vs. Standard Deduction

To claim the aforementioned deductions, you must itemize your deductions on Schedule A of your tax return. Itemizing involves listing your eligible expenses and deducting them from your income.

The standard deduction is a fixed amount that you can deduct without itemizing. For 2023, the standard deduction is $13,850 for single filers and $27,700 for married couples filing jointly.

If your total itemized deductions exceed the standard deduction, it is more beneficial to itemize. However, if your itemized deductions are less than the standard deduction, taking the standard deduction will save you more money.

Home Sale Exclusion

When you sell your home, you may be eligible for a home sale exclusion. This exclusion allows you to exclude up to $250,000 of profit ($500,000 for married couples filing jointly) from taxation.

To qualify for the exclusion, you must have owned and lived in the home for at least two of the five years before the sale.

Tax Credits for Homeowners

In addition to deductions, there are also tax credits available for homeowners. These credits directly reduce your tax bill, dollar for dollar.

1. Mortgage Credit Certificate (MCC):

  • An MCC is a certificate issued by a state or local government that allows you to claim a tax credit for a portion of your mortgage interest.

2. Energy-Efficient Home Improvements Credit:

  • You may be eligible for a tax credit for installing energy-efficient improvements in your home, such as solar panels or energy-efficient windows.

Buying a house can have a significant impact on your taxes. By understanding the various tax deductions and credits available to homeowners, you can minimize your tax liability and maximize your savings.

Remember to consult with a tax professional for personalized advice and to ensure that you are taking advantage of all eligible tax benefits.

Everything you need to know about filing taxes as a new homeowner


How does buying a house affect my taxes?

The main tax benefit of owning a house is that the imputed rental income homeowners receive is not taxed. Although that income is not taxed, homeowners still may deduct mortgage interest and property tax payments, as well as certain other expenses from their federal taxable income, if they itemize their deductions.

What changes when filing taxes after buying a house?

Mortgage interest is tax-deductible, and the advanced interest payment may be tax-deductible as well. If you recently refinanced your loan or received a home equity line of credit, you may also receive tax-deductible points over the life of that loan.

What is the tax benefit of mortgage?

Mortgage interest deduction limit You can deduct the mortgage interest you paid during the tax year on the first $750,000 of your mortgage debt for your primary home or a second home. If you are married filing separately, the limit drops to $375,000.

Is a down payment on a house tax-deductible?

Homeowner costs that aren’t tax-deductible Costs for getting or refinancing a mortgage, such as loan assumption, credit report and appraisal fees. Depreciation. Forfeited deposits, down payments or earnest money. Home insurance premiums.

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