Buying a home involves many costs beyond the actual sale price you agreed to pay. Expenses like closing costs, mortgage interest and taxes can add thousands of dollars to your annual cost of living. The federal government offers several tax breaks related to buying and owning a home that can lead to serious tax savings for many homeowners.
Taking out a mortgage can be costly because you have to repay the original amount plus interest. Even if your interest rate is 3 percent or less, which is extremely low by historical standards, you'd pay thousands of dollars in interest a year on a $150,000 home. The IRS lets you deduct mortgage interest paid on a primary residence and a second home up to a maximum of $1 million in mortgage debt.
When you take out a mortgage, there's good chance that you'll have to pay some upfront charges, known as mortgage points or loan origination fees. The Internal Revenue Service considers mortgage points a form of prepaid interest, so they are tax deductible. The IRS says that mortgage points are generally deductible over the life of your mortgage, although points may be fully deductible in the year you pay them if charging points is an established business practice in your area and the points you pay are based on a percentage of your home's value. You can't deduct closing costs other than mortgage points, so legal fees, commissions, home appraisals and other miscellaneous costs paid at closing aren't deductible.
Private Mortgage Insurance
Most mortgage lenders require you to make a substantial down payment toward the purchase of a home. In general, if you don't make a down payment of at least 20 percent of a home's sale price your mortgage will include an extra cost called private mortgage insurance that protects the lender against losses if you fail to pay your loan. The IRS considers private mortgage insurance a form of mortgage interest, so it is a tax deductible expense.
Real Estate Taxes
In real estate, there's an old saying that says the three most important considerations when buying property are location, location and location. A home's neighborhood, such as its school district and local amenities can have a big impact on its value and on your property taxes. State and local governments make property owners pay real estate taxes to sustain public goods like schools, parks, libraries and roads. The federal government lets you deduct all the real estate taxes you pay on a home, as long as the taxes are based on the value of your home and charged uniformly on all properties in your local government's jurisdiction.
Home renovations are generally not tax deductible, but certain energy efficient home upgrades can qualify for federal tax credits. According to ENERGY STAR, you can get tax credit of up to 30 percent of the cost of small wind turbines, solar panel systems, geothermal heat pumps and solar powered water heaters installed on newly constructed homes or existing homes. The tax credit is available through the end of 2016. Home renovations that are medically necessary, such alterations to make a home wheelchair accessible for you, your spouse or a child can be deducted as medical expenses.
- IRS: Publication 530 - Main Content
- IRS: Publication 523 (2011), Selling Your Home
- TurboTax: Home Ownership Tax Deductions
- IRS: Publication 936 - Main Content
- IRS: In 2012, Many Tax Benefits Increase Due to Inflation Adjustments
- Kiplinger: Tax Breaks for Homeowners
- ENERGY STAR: Federal Tax Credits for Consumer Energy Efficiency
- IRS: Publication 502 - Main Content
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