If you’re thinking about buying a home, there are lots of advantages to consider. Of course, hanging a picture on the wall or making changes without permission from anyone is pretty attractive. But the tax advantages can be even better. The federal government has established numerous tax deductions and credits to encourage home ownership.
Better Rate Mortgage can help you get the best possible interest rates for your mortgage, with personalized service and fast loan closings to get you into your new home faster. One of our loan experts can explain more about how your mortgage can help save you on taxes, or you can talk with a local accountant.
Here’s what you should know about the tax advantages to owning a home.
Understanding Tax Credits and Deductions
With taxes, there are credits and deductions that can both save you money. A credit is money that comes right off the top of your taxes. Think of it as a coupon at the grocery store. A $500 credit reduces your taxes instantly by $500. A deduction reduces your adjusted gross income, which in turn, reduces your tax liability, or the amount of taxes you owe.
With the combined tax credits and deductions possible for owning a home, you can realize substantial savings on your income taxes each year — and it’s completely legal! The money you save can be used to further improve your home or for other uses. But who couldn’t use a few extra hundred dollars? Your savings could even be into the thousands!
Tax Deductions
As mentioned above, tax deductions reduce your adjusted gross income, meaning that you report less income and pay less taxes. Most of the favorable breaks for owning a home come through tax deductions. The most common are briefly described below.
Mortgage Interest Deduction
With very few exceptions, homeowners can deduct all of the interest paid on their mortgage loan. Each year, your lender sends you IRS Form 1098, detailing the amount of interest you paid in the previous year. This should also include the amount of closing costs if you purchased your home in the last year.
Real Estate Taxes
Your yearly property taxes are also tax deductible. If you pay your taxes through a lender, you’ll find the amount on your IRS Form 1098. If you pay them directly to your local government, you may have to search for this payment amount in your personal banking records. You can also ask the municipality for a statement.
Points
Sometimes loan points can earn you a tax deduction. Points are normally priced as a percentage of your mortgage loan. If you paid $200,000 for your home, each point costs you 1% of your home, or $2,000. As long as you actually gave the lender money for these points, you get a deduction. You may also earn a deduction if you refinanced your mortgage or opened a home equity line of credit.
Mortgage Insurance
More recent homeowners might be able to deduct their yearly private mortgage insurance payments. Lenders charge this insurance to borrowers who put down less than a 20% down payment when purchasing a home. There is an income threshold for taking this deduction that is different for single homeowners and families.
Tax Credits
Tax credits are like coupons that take an amount of taxes right off the top of your tax bill. There are typically fewer of them available, but they can still save you money. And every bit of money saved from your mortgage is money earned.
Mortgage Tax Credit
Some homeowners may be eligible for a mortgage tax credit if they received a qualified Mortgage Credit Certificate (MCC) by a state or local governmental unit or agency. These are part of some mortgage credit certificate programs.
State and Local Incentives
Most states and many local governments offer tax credits and other incentives for making energy-efficient improvements to your home. Some of these can include:
- Installing solar panels
- Becoming part of a solar power grid
- Increasing the insulation in your home
- Sealing doors, windows, and other openings
- Installing energy-efficient doors and windows
- Installing programmable thermostats
- Upgrading your HVAC system
- Installing energy-efficient lighting
You can search for your state and find tax breaks and incentives that may apply to your home or mortgage type.
Enjoy Tax Advantages and the Perfect Loan for You!
Get in on these and other possible tax advantages when you purchase a new home! Better Rate Mortgage can help you explore the different types of mortgage loan options and help you find the best fit for your needs and budget. Begin now with our fast Home Purchase Qualifyer and let’s begin the process of buying your new home!
