Buying a new home is a big step for many reasons. You’ll finally live in a house you can call your own, you’ll start to build home equity, and you’ll never have to deal with an over-involved landlord again. But did you know there are tax breaks for buying a home? While tax purposes shouldn’t be the primary reason to buy a home, especially if it is out of your budget, tax breaks are a nice bonus.
Home Mortgage Interest Deduction
New homebuyers can itemize deductions on their taxes, which include the interest on the home’s mortgage. The tax deduction is made based on the accrued interest you pay your lender. Homeowners can also write off interest on a loan that may have been taken out for home improvements. Your lender, or lenders, will send you the tax form 1098 that will show the interest you paid on your loans, which you will be able to deduct on Schedule A for your taxes. Under the Tax Cuts and Jobs Act (TCJA), mortgage interest starting in the 2019 tax year can be deducted on loans up to $750,000. Taxpayers with existing mortgages prior to the new tax law are grandfathered into the previous $1,000,000 mortgage limit.
Sometimes, in order to buy a house, you are required to pay a certain percentage on the total amount. Called “points,” this amount can also be applied to a deduction. If you paid a 2% fee on a $200,000 mortgage, it means you paid two points and $4,000 can be deducted as an itemized deduction. In the case of a refinance, those funds are deducted over the term of the refinanced loan.
Real Estate Taxes
When you buy a home, you are allowed to deduct property taxes, which are one component of what is frequently called SALT deductions. The Tax Cuts and Jobs Act, however, put a cap on the amount of state and local property taxes you can claim. As of 2018, the deduction limit is $10,000. If you have high property taxes on your home or pay significant state income taxes, this change will hit the hardest, which makes going to a professional even more important.
C&D | Navigating Tax Breaks for a Home Purchase
Remember that the standard deduction increased to $12,000 for single taxpayers and $24,000 for married filing for 2019 under the Tax Cuts and Job Act. Depending on the amount of mortgage interest and property taxes, homeowners doing their taxes in the future may still be better off itemizing their deductions. It’s also important to note that some states, including California, have not adopted the new rules. They still follow the prior tax code which has added to the complexity of tax filing requirements. That’s where we can help most with here at C&D. Give us a call, and we can get you the right tax return on your home.