If you’re thinking about buying a home, you have to know the tax benefits associated with your potential purchase.
The U.S. government encourages home buying through a bevy of incentives, including tax credits and deductions. Anything from mortgage interest rates to home improvement costs can be taken off your taxes in April.
What many overlook, however, is the fact that the House and Senate change the tax code annually; this requires one to be on top of new laws and regulations.
Taking all of this into account, here are a few financial hacks that any first time homebuyer should take advantage of.
PENALTY-FREE IRA WITHDRAWALS
Typically, you’re not allowed to withdraw money from your IRA until age 59 ½ without incurring a penalty from the IRS.
First-time homebuyers, however, are allowed to take up to $10,000 from their IRA without paying a penalty. While you will still be required to pay taxes on the withdrawal, you’ll have another resource to help pay a down payment and closing costs.
Technically, you don’t even have to be a first-time homebuyer; as long as you haven’t owned a home in at least two years, you’re in the clear.
MORTGAGE INTEREST TAX CREDIT
Quite simply, the mortgage interest credit directly decreases the amount that a homebuyer pays in taxes the following year.
Up to 20 or 30% of your incurred interest can be returned in the form of a credit. This rate is largely dependent upon how much you paid for your home.
While you can eliminate your entire tax bill for a given year with this incentive, your tax break cannot exceed the price of your tax bill, nor can it be carried over to the following year.
Typically, one must be issued a Mortgage Credit Certificate by their state or local government to take advantage of this credit. This certificate will declare the amount you can take off your tax burden.
HOME IMPROVEMENT AND REPAIRS TAX DEDUCTION
The aforementioned home improvement tax deduction is great for a couple of reasons.
First of all, if you take out a loan— e.g. a home equity loan— to pay for the improvements, you’ll qualify for deductions, much as you would for your mortgage.
Also, if you document your improvements and their costs, you’ll later on be able to deduct those costs from your capital gains liability, should you later sell the property.
MORTGAGE INTEREST DEDUCTION
If as a first-time homebuyer, you only take advantage of one homebuying hack, let it be the mortgage interest deduction.
For married couples, it allows all interest paid on loans up to $1 million to be deducted. (For those married, but filing separately, one can only deduct $500,000.)
It’s especially important to take advantage of this deduction from the get-go, as the incurrence of mortgage interest tends to be highest during the initial years of the agreement— i.e. you are paying more interest than principal.
New homebuyers should request Form 1098, also known as the Mortgage Interest Statement, from their loan provider at the end of the year.
MORTGAGE POINTS DEDUCTION
Mortgage points, in broad strokes, are payments that a homebuyer makes in advance in order to reduce their future interest liability.
One mortgage point equates to one percentage point of the total loan amount, which usually results in your loan’s interest rate being reduced by a fraction of a percent.
The great thing about mortgage points is that they can also be deducted from your taxes. The only things to note are that you must itemize this deduction— making sure to specify it as being “points”— and your loan amount must be under $1 million.
PROPERTY TAX DEDUCTION
Property taxes may be a pain in the neck, but first-time homebuyers can usually deduct them.
You can deduct your paid property taxes for part or the entirety of a year, depending on when you purchase your home. Usually, it must be your primary residence— i.e. you live at the property.
HOME ENERGY TAX CREDIT
Last but not least, the home energy tax credit has allowed Americans to deduct certain renewable and energy-efficient home improvements from their tax bill.
Many of the credits have expired as of 2017; a more detailed explanation of what credits have been eliminated can be found here.
If you made qualifying improvements in 2016 or earlier, it would be wise to check whether you can take a deduction.