Home Ownership & Your Taxes

Homeownership comes with many financial perks like building equity, and enjoying the predictability
of a relatively stable monthly payment. And, if you itemize your taxes, you may qualify for substantially
more deductions for mortgage interest, mortgage insurance, and more.

Between local and Internal Revenue Service (IRS) tax regulations, homeownership-related taxes are in
a constant state of change. But the benefits of staying up-to-date can pay big.

Here are some of the many possible deductions you could take advantage of once you own a home.

Real Estate Taxes

State and local property taxes can inflate your monthly mortgage payments, but luckily, they’re tax-deductible up to a certain limit. But this can be confusing for the year that you purchase the home—when both the seller and the buyer may be responsible for real estate taxes. According to the IRS, you can still deduct if the seller pays your share of the real estate taxes (the taxes beginning with the sell date).¹ The same principle applies if you pay any part of the seller’s share of the real estate taxes and the seller doesn’t reimburse you.¹

Mortgage Interest

In the vast majority of cases, you’ll be able to deduct home mortgage interest on your tax return up to a certain amount. Note that the mortgage must be secured by your personal home—not an investment property.¹ Taking advantage of this deduction early in the home taking advantage of this deduction early on is ideal since most people tend to pay more in interest at the beginning of the loan’s lifecycle.

Points

There are two different types of points you may pay when purchasing a home:

• Origination points: Typically income for the lender— essentially, the “cost of doing business.”
• Discount points: A type of prepaid interest that can lower your interest rate. These are most beneficial       if you plan to stay in your home for a long time.

Points are tax-deductible if they meet the criteria outlined by the IRS. If you itemize the year that you receive your home loan, you can deduct the total number of points that year or extend the deduction over the life of the loan.¹ Even if the seller offers to pay points on your behalf, they’re still deductible if they meet IRS criteria.¹

Mortgage Insurance

If you put down less than 20 percent on your loan and pay Private Mortgage Insurance (PMI), you may be able to deduct this from your taxes if your income is under a certain amount. Mortgage insurance provided by the Veterans Administration, Federal Housing Administration, or Rural Housing Administration also qualifies for this deduction.¹

Energy Efficiency

Certain energy-conserving home improvements may qualify for tax credits or similar benefits. While the qualifying improvements vary depending on the tax year, in the past, they have included solar electric property, geothermal heat pumps, small wind turbines, and more.² It’s also worth looking into what state and local government incentives are available for energy improvements.³

How Do I Know What I Qualify for?

The good news? As a homeowner, you’ll have more tax deductions at your disposal. The not-as-good news? It makes your taxes more complicated. Itemized deductions aren’t right for everyone and tax law changes regularly. Consult a financial professional who can help you determine how to approach your taxes after buying a home.

Sources
1. “Publication 530 (2020), Tax Information for Homeowners.” Internal Revenue Service, 2021. February 17.
https://www.irs.gov/publications/p936.
2. “Energy Incentives for Individuals: Residential Property Updated Questions and Answers.”
Internal Revenue Service, 2021. May 4.
https://www.irs.gov/newsroom/energy-incentives-for-individuals-residential-property-updated-questions-and-answers.
3. “State and Local Incentives.” Office of Energy Efficiency and Renewable Energy.
https://www.energy.gov/eere/buildings/state-and-local-incentives.