You can claim a lot of tax write-offs when you buy a house, but your down payment isn't one of them. That applies whether you're buying your first home, a vacation home or an investment rental property. Down the road, however, you may be able to write off some of the down payment and the mortgage loan through depreciation.
While some expenses related to the purchase of a home are deductible on one's taxes, a down payment is not.
Closing Costs Deductions
When you close on the house, you can write off some of the costs you pay other than the actual down payment. You can write off sales taxes on the purchase as an itemized deduction on Schedule A, as well as any property taxes due at closing. If you pay points — prepaid interest on the loan — those are deductible too.
Home Office Depreciation
If you use part or all of the house for business for a home office, storage space for inventory or as a rental home, you can deduct the actual expenses of operating your business and the related depreciation of the building. Operational expenses can include mortgage interest, insurance, utilities and repairs. For depreciation, you take a write-off every year to reflect how age reduces the building's value. All home office deductions are based on the percentage of your home that you use for business. For example, if you use 8 percent of your home for business, you depreciate 8 percent of the home's value.
A simpler option for home office deductions is available. You can use the IRS’s prescribed rate of $5 per square foot for up to 300 square feet as your home office deduction. However, depreciation is not included in this easy calculation.
Rental Property Depreciation
With a rental house, you depreciate the home's value, based on purchase price, minus the value of the land. If your purchase contract for the house didn't specify the value of the land, you can look up the most recent tax assessment on your county assessor’s website or in their office. It should include separate appraisals for the house and the ground under it. For real estate, you use "straight line" depreciation, in which you deduct an equal share of the basis — the cost of the house — every year but the first and last. You depreciate rentals over 27.5 years and other business uses over 39 years.
Rental Property as Business
If the house you bought is a rental property, you can claim taxes and points as a business expense. This works out well, as you can deduct them even if you don't itemize. However, you may not be able to deduct rental losses from non-rental income — it depends how actively you manage your property. When you use part of the house for business or rent out a couple of rooms, you can deduct the appropriate percentage of your taxes, just as you did with depreciation.
- How to Calculate House Depreciation
- Can You Deduct Mortgage Interest If You Don't Itemize Deductions?
- Tax Deductions for Renting Out a Room in Your House
- Tax Consequences of Converting a Rental Property Back Into a Dwelling
- How Much Mortgage Can I Write Off Based on Income?
- Is Homeowners Insurance Tax Deductible?
- Ways to Claim My House as a Home Office
- Can Taxes You Pay on Your House Be Deducted on Your Federal Return?