Young couple talking to new realtor to buy a house.

Are You A First-Time Home Buyer? Take Advantage Of These Tax Deductions

6-minute read

Purchasing a home is a life-changing event. You’re suddenly responsible for a number of things you may not have been responsible for if you rented in the past, including mowing the lawn, shoveling the driveway or repairing a leaky roof. There’s a whole other aspect to owning a house apart from a few additional chores, though. Your home also affects your taxes.

If you’re already a homeowner, this probably isn’t news to you. However, if you’re in the market for your first home, I’ve got some valuable information for you. Below you can find information about what you can and can’t deduct, available tax credits and other tips for you to become a tax savvy homeowner!

Do You Get A Tax Credit For Buying A House?

The answer to this question is maybe. It depends on what you qualify for, and things are a bit nuanced. For now, let’s start with a more basic question: What is a tax credit?

Tax credits are items that’ll lower your overall tax bill. These credits can be refundable or nonrefundable.

Nonrefundable tax credits can be used to reduce someone’s individual tax liability down to $0. This means that if you owed $500 in taxes and qualified for a $700 credit, you wouldn’t owe any taxes, but you also don’t get the $200 back. In contrast, if the credit is refundable, you’re entitled to the full amount if you qualify no matter what your tax bill is. This can be used to increase the size of your refund. For that reason, refundable credits are considered to have the biggest benefits for the taxpayer.

Is There A Tax Credit Available For First-Time Home Buyers?

When it comes to your federal taxes, the answer to this question is technically yes. Although the refundable first-time home buyer tax credit existed between 2008 and 2010, if you entered into a contract to buy a primary residence before April 30, 2010 and closed by September 30 of that year, you may still be eligible if you’ve never claimed the credit before.

If you bought a home in 2008 with the credit, it functions like an interest-free loan. If you claimed the full amount of the credit, $7,500, you have to repay it in $500 installments over the next 15 years, beginning with the year after the credit is claimed. We have more information on repayment. If the house season is to become your primary residence at any point during that 15-year period, whatever balance you have left is owed on your next tax return.

If you bought a home in 2009 or 2010, you don’t have to repay the credit unless you stop using the home as your primary residence within three years of the date you closed. If you did, you pay off the full balance.

Individual states may have their own credits available for first-time home buyers, but down payment assistance is far more common. A good place to start your search for state programs is the local home buying page maintained by the Department of Housing and Urban Development (HUD).

Mortgage Interest Credit

The other type of credit that’s available on federal taxes is the mortgage interest credit. It’s intended to help low-to-moderate income families afford homeownership. Unlike the mortgage interest deduction, which we’ll discuss below, this can directly lower your tax bill.

In order to claim the deduction, you have to get a mortgage credit certificate (MCC) from an authorized state or local government agency. The credit is limited to up to $2,000.

What Is Tax Deductible?

Tax deductions aren’t money you get back on your refund, but they do reduce your taxable income, thereby potentially lowering your tax bill. Let’s go over some of the deductions homeowners can take.

Mortgage Interest

A new mortgage means a little more work for you when it comes time to file your taxes. However, the extra work is worth it in the end. Perhaps the most important tax deduction you need to be aware of is your mortgage interest. At year-end, check out Form 1098 from your lender to see how much mortgage interest you’ve paid.

In most cases, mortgage interest is fully deductible. There are limits, though. First, the mortgage has to be for the purpose of building, buying or remodeling your home. This is referred to as home acquisition debt. You can also only deduct interest on your primary home and a single vacation residence.

Secondly, there are limits on the amount of the mortgage you can take out.

Because of changes that came in with last year’s Tax Cuts and Jobs Act, if you got a mortgage on or after December 15, 2017, the limit on the amount of mortgage debt you can claim this on is $750,000 for single people, heads of household or joint filers (or $375,000 for people who are married and filing separately).

If you purchased your home before that date, your grandfathered in under the old limits, which were $1 million or $500,000 if married and filing separately.

If you take the mortgage interest credit mentioned above, you can still deduct your interest, but you need to reduce the deduction by the amount of the credit.

Mortgage Points

Simply put, mortgage points are prepaid interest. You can purchase points to lower your interest rate when you get your loan. By purchasing points, you can save money in the long run if you stay in the home for a certain period of time, depending on the amount of points you purchase.

For example, if you have a $200,000 mortgage and buy two points, you’ll owe $4,000 for those points at closing. (Each point is 1% of the value of your mortgage.) If buying the points lowers your payment $250 a month, you’ll have to stay in your home for at least 16 months to break even. After that time passes, you’ll start putting money back in your pocket.

One thing to note is that you can’t deduct mortgage points all at once in the vast majority of cases. You have to spread the deduction over the term of the mortgage. There are limited exceptions.

State And Local Tax Deductions (SALT)

You can also deduct your state and local taxes as well as real estate taxes. There’s now a limit of $10,000 on this deduction. Previously, you could deduct every dollar of state and local taxes.

Is PMI Tax Deductible In 2018?

For right now, private mortgage insurance (PMI) isn’t deductible for the 2018 tax year. The same is true for mortgage insurance premiums (MIP) on FHA loans and USDA guarantee fees.

Rep. Julia Brownley of California has introduced the Mortgage Insurance Tax Deduction Act of 2019. It seeks to make the mortgage insurance deduction permanent for the majority of Americans. In its current form, the bill would make mortgage insurance deductibles retroactive to this year.

It should be noted that this has just been introduced in the House of Representatives and referred to the United States House Committee on Ways and Means. If it gets out of there, then the whole House has to approve it. Then it goes over to the Senate and the whole process starts all over again. If the Senate passes it and there are no differences in the bill, it goes directly to the president for his signature. If there are differences in the House and Senate bills, a conference committee has to hammer out a compromise bill that gets passed by both chambers which then gets sent to the president.

If the president vetoes the bill, it can still go into effect if passed by a two-thirds majority of both chambers of Congress. This is a good summary of the process.

Sorry about the mini government lesson. But it was a long way of saying that while there’s still hope that mortgage insurance fees for this year might be tax-deductible, there’s still a ways to go.

Are There Any Tax Breaks For Homeowners?

We’ve included this category because this last tip doesn’t fall into being a credit or deduction.

You can withdraw from your IRA once in order to fund a down payment as a first-time home buyer. If it’s a traditional IRA, you’ll need to pay income tax on the withdrawal, but there’s no penalty. If it’s a Roth IRA, you don’t have to pay income tax on the withdrawal because you paid income tax already when you put in the money.

You can also borrow from your 401(k), but you do have to pay it back.

While we’ve tried to provide in general tax advice here, everyone’s situation is different. If you have any doubts, please feel free to consult a financial advisor, tax professional or tax preparation software.

Table of Contents