When you commit to buying a home, you take the sweet with the sour. Right alongside the security of ownership and the potential of decorating the walls with a lifetime's worth of warm memories, you've also taken on an immense amount of financial responsibility. According to 2018 research from the Urban Institute, the average first-time homebuyer in the U.S. spent $245,320 on their home, with an average down payment of $22,561. Likewise, LendingTree pegs the average monthly mortgage payment at $1,029, or roughly 14.84 percent of the typical homeowners’ monthly income.
But your grandpa told you that you've got to spend money to save money – he must've been talking about those sweet homeowner tax breaks, right? Well, yes and no. Some tax benefits of owning a home are undeniable, but there's no such thing as an "average" tax return after buying a house. The helpful and hurtful tax effects vary per each homeowner's situation, especially since the tax reforms of 2018.
Unhelpful Tax Return: House Purchase
Most homeowner-oriented tax talk focuses on deducting mortgage interest and the like, but taxation may start as soon as you make the actual transaction of buying the house. Even if you think you know your state's regular sales tax, it may not apply to a home purchase. On the other hand, states like California charge sales and use tax on mobile homes, so long story short, know the local tax codes to keep expectations in perspective before you buy.
Whether or not the purchase of your new home is taxed depends entirely upon the state in which you and your house reside; not to mention additional sales taxes enforced by cities and even counties. Most commonly; states, counties and municipalities enforce a transfer tax when real estate changes hands. Also known as stamp taxes or documentary taxes, this type of tax often ranges from about 0.1 percent to about 3 percent, depending on the state or city. Some real estate transfer taxes in California are as low as 0.055 percent while those in Maryland top out at a whopping 5 percent. However, various regions call for all sorts of different rules, ranging from a flat fee, such as in Arizona, to a tax percentage that scales with the price of the home, such as in Hawaii. How and when this tax is collected also varies per state. In some cases, the tax burden may be shared between the buyer and seller, or it may even fall on the seller alone.
Helpful Deductions: Your Mortgage
The bad news: Unlike property taxes, real estate transfer taxes are non-deductible on your federal tax return.
The good news: Your mortgage interest may very well be deductible. And considering that most payments toward the beginning of a mortgage cycle go primarily toward interest, that's a big break on your return. Prior to the 2018 tax year, if you itemized deductions on your tax return, took out a mortgage for a principal residence, paid interest during the tax year or have total mortgage debt under $1 million plus an additional $100,000 for equity debt, there's a good chance you can claim an interest deduction on your taxes. Keep in mind that new tax legislation for 2018 may affect this perk.
You may also be able to deduct the full amount of loan-origination fees you paid during the tax year, also known as points, maximum loan charges or discount points. To qualify for this deduction, your mortgage must secure your primary residence, and you must have paid a points rate that's common in your area. Similarly, the points can't have replaced other common fees, such as appraisal costs or property taxes. Additionally, the deduction must be claimed the same year you paid the fees and the cash paid at closing must be equal to or greater than the points.
Unhelpful Changes: New Mortgage Laws
Due to changes in federal tax laws, for homes purchased in 2018 or later, the maximum amount of mortgage debt upon which you can claim the deduction is $750,000 for those married filing jointly or $375,000 for those filing separately. In California, for instance, median home prices have broken the $600,000 mark in years past. For some homeowners, these lower caps mean significantly lower tax savings.
In previous tax years, those who paid a mortgage on a $750,000 home were primed to save about $12,700 on their taxes each year on mortgage interest alone. That's a huge tax break for buying a house, but it's unfortunately no longer the case. This also makes homes around the $750,000 to $1 million marks much less appealing buys to new owners, should you decide to sell. So if you have an eye on a new pad in this price range, chances are it won't help your tax return much at all.
Helpful Bonuses: Property Taxes, Itemizing
Fortunately, deduction opportunities don't end with your mortgage interest and points. On the downside, you'll have to pay property taxes on your home to state and local governments annually. On the upside, you can deduct up to $10,000 of those property taxes as of 2018. Even better, that $10,000 deduction can come from the combination of the state and local sales tax you paid when purchasing the house plus your property taxes, as long as you itemize your deductions via Schedule A come tax season.
So when you get a letter saying that your property taxes have gone up (one of the many joys of homeownership) remember this silver lining: The amount you can deduct increases, too.
Ready for another silver lining? Before you bought a house, there's a good chance you claimed the standard deduction instead of itemizing. But now that you've taken on costs such as real estate taxes and mortgage interest, there's a much better chance that you'll reap the greater rewards of itemized deductions. This means that things like the donations you made to the ASPCA and Planned Parenthood or the HDTV you gave to Goodwill have just become charitable donation deductions. The savings aren't huge, but that's more money for you and less money for the IRS.
Unhelpful Laws: New Standard Deduction
On paper, the 2018 tax reform looks good for people who might be interested in buying homes. The new rules just about doubled the standard deduction, which is the deduction you claim if you don't itemize. Previously, the standard deduction was $6,500 for individuals, $9,550 for heads of household and $13,000 for married couples filing jointly. As of the 2018 tax year, those amounts have jumped to $12,000, $18,000 and $24,000, respectively.
Naturally, you'll want to itemize your deductions via Schedule A if the savings are greater than the standard deduction. In previous tax years, this was potentially a big boon for homeowners, as their itemized deductions easily exceeded the standard deduction. Of course, this will vary on a case-by-case basis, but there's now a much better chance that you'll end up claiming the standard deduction whether or not you purchased a house during the tax year. Consequently, this removes one of the key tax-season appeals of homeownership. In 2018, the Joint Committee on Taxation expected that 61 percent fewer taxpayers were expected to claim itemized deductions compared to previous years.
Helpful State Incentives: Tax Credits
Though specific qualifications vary per state, low-income homebuyers may benefit from the mortgage interest credit. After a successful application via Form 8396, you'll receive a Mortgage Credit Certificate, which gives you a 10-to-50 percent credit to reduce the amount of tax you owe.
Generally, homeownership tax credits are a state-by-state thing, but they can be incredibly helpful tools for your tax return. In Washington, for instance, you can defer some of your property taxes if you make $57,000 or less annually while Georgians get a standard homestead exemption of $2,000 and double that for seniors. Because tax credits differ so widely per state, your credit mileage may vary – take a peek at your local tax authority or department of revenue website to find out what breaks might be in store for you.
- Credit Karma: Buying House: The Tax Impact of Your New Home
- LendingTree: National Average Monthly Mortgage Payment
- National Conference of State Legislatures: Real Estate Transfer Taxes
- Intuit TurboTax: Life Events Series: How Will Buying My First House Help My Taxes?
- Forbes: Buying a House? Don't Do It for the Tax Breaks?
- CALMatters: What a $500,000 Home Looks Like in California – and How It Shapes Where We Move
- Bankrate: Mortgage Interest Tax Deduction Calculator
Dan's decade-long experience as a freelance writer and small business owner has seen him contribute to financial publications including Chron.com, Zacks.com, MSN Money, Fortune, Motley Fool and others.