Tax Considerations for First-Time Homebuyers

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First-time homebuyers may be unaware of the wealth of tax credits and deductions available to them upon purchasing their home, especially due to the ever-changing tax code in the U.S. Many of these tax incentives are designed by the IRS to encourage home ownership and offer property owners significant financial advantages over renting your home.

There are a number of tax breaks that both first-time homebuyers and existing property owners can utilize, especially with regard to mortgage interest and property taxes. The most common and useful tax considerations for first-time homebuyers to master include:

Number 1  Home Mortgage Interest Deduction

Perhaps the most vital and commonly utilized tax deduction is the home mortgage interest deduction, which applies to interest paid on loans of up to $1 million, or $500,000 for property owners who are married but filing separate tax returns.

This deduction is especially useful for first-time homebuyers since the amortization on mortgages generally means owners pay more in interest in the beginning years, and less interest later over the life of the mortgage.

At the end of each tax year, your mortgage provider will send you a Form 1098, which details the total amount of mortgage interest you paid in the previous year. Your tax preparer will then apply this amount toward your mortgage interest deduction on Schedule A of your tax return.

Number 2 Mortgage Points Deduction

Homeowners may also deduct mortgage points, which are interest that’s prepaid in order for the borrower to obtain a lower long-term interest rate on the loan. To claim the deduction, borrowers must itemize their tax returns, and the loan in question must be for $1 million or less. Furthermore, your loan’s settlement disclosure statement must specifically list the applicable fees as “points.”

Number 3 Mortgage Interest Credit

Not to be confused with the mortgage interest deduction, the mortgage interest credit counts directly against your tax bill, lowering the total amount of taxes you owe for the year. The credit is non-refundable, however, so you won’t receive a refund payment for it in the event the credit is for more than what you owe in taxes. Also, if you are claiming the mortgage interest deduction, you must reduce your mortgage interest credit by the amount of the interest deduction.

In order to be eligible for the credit, property owners need a Mortgage Credit Certificate, usually provided by your state or local government when you enact the mortgage. The certificate will state the credit amount you’re entitled to receive. Use IRS Form 8396 to apply the credit to your return.

Number 4  Property Tax Deduction

First-time homebuyers will also be happy to know they can save considerably on annual taxes by deducting the property taxes paid on their home for the year. The deduction, which must be itemized on Schedule A, applies to primary residences for the year in which the taxes are filed. For the first year of ownership, you deduct all taxes paid from the date of sale through the end of that year.

Number 5  Home Improvement Tax

Property owners who utilize a home equity loan or a similar property-secured loan to fund capital improvements to their home can qualify for the same mortgage interest deduction they receive for the primary mortgage. It’s also useful to keep detailed records and receipts from such capital expenditures, especially if you decide to sell: The cost of the improvements will increase your tax basis on the home, lowering the amount you’ll pay in taxes on any profits you receive from the sale.

Number 6  IRA Withdrawls

The IRS allows first-time homebuyers to withdraw funds from IRA accounts in order to help with down payments and closing costs, without paying the normal 10% penalty applied to early IRA withdrawals. This also applies to property owners making a new purchase who haven’t bought any real estate in the last two years; technically they are considered first-time homebuyers, too.

Under the current IRS rules, borrowers can withdraw up to $10,000 from their IRA in order to purchase a home, without paying a penalty. You will, however, still need to pay taxes on the withdrawal. The exemption does not apply to 401K accounts.

Number 7  Tax Energy Credit

First-time homebuyers should also know that there are two popular tax credits that are no longer available, beginning with the 2017 tax year: the Nonbusiness Energy Property Tax Credit, which credited 10 percent of the cost of qualified home energy-efficient products between $50 and $500; and the Residential Energy Property Tax Credit, which was equal to 30 percent of the cost of installing renewable energy sources. Any work done or expenses paid for these improvements in 2017 and onward will not qualify for these credits.

If you did make renewable energy improvements prior to the January 1, 2017, cutoff you can still apply for the credits, using Form 5695. Existing homeowners and first-time homebuyers are both eligible; just be sure to save all pertinent receipts and contracts.


Robert Hall & Associates IconNeed guidance with your real estate taxes, credits and deductions? Robert Hall & Associates is a premier tax preparer and advisor serving the San Fernando Valley, including Glendale, Pasadena, and Burbank, as well as the Greater Los Angeles area. For questions on your next tax return and how to maximize your homeowner deductions and credits, please contact us online or call (818) 242-4888.

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