Can You Write Off a Down Payment on a House?

When purchasing a home, understanding the tax implications is as important as securing financing. Homebuyers often wonder what aspects of home buying are deductible and which aren’t, as this knowledge is crucial for maximizing tax benefits.

Down Payments vs Mortgage Interest

It’s important to distinguish between down payments and mortgage interest when considering the tax implications of buying a home. A down payment, a significant upfront cost, is not tax-deductible. The IRS views it as a capital investment rather than an expense that can be written off against taxable income.

In contrast, mortgage interest is deductible under the U.S. tax code. Homeowners can deduct interest on loans up to $750,000 for married couples filing jointly, or $375,000 for single filers. This deduction, claimed on Schedule A of Form 1040, requires itemizing deductions rather than taking the standard deduction. For those with high mortgage interest payments, this can lead to substantial tax savings.

While the down payment builds equity in the home, the mortgage interest deduction provides ongoing tax relief. Homebuyers should evaluate their financial situation and consult a tax professional to determine the best approach for maximizing tax benefits.

Points Paid at Closing

When closing on a home, buyers may have the option to pay points, or discount points, to lower their mortgage interest rate. Each point costs 1% of the loan amount and typically reduces the interest rate by about 0.25%. This can be a cost-effective choice for buyers planning to stay in their home long-term, as it can result in significant savings over time.

From a tax perspective, points paid at closing are deductible under certain conditions. The loan must be used to purchase or build a primary residence, the points must be standard for the area, and the amount must be clearly stated on the settlement statement. If these criteria are met, the deduction is available in the year the points are paid.

If the points don’t meet these criteria, they may still be deductible but must be spread out over the life of the loan. In such cases, a portion of the points can be deducted annually as part of the mortgage interest deduction. Keeping thorough records and consulting a tax advisor ensures homeowners accurately claim eligible deductions.

Mortgage Insurance Premiums

Mortgage insurance premiums (MIPs) are often required for buyers making a down payment of less than 20% of the home’s price. This insurance protects lenders from borrower default but also provides a potential tax deduction. To qualify, the mortgage insurance contract must have been issued after 2006, and the taxpayer’s adjusted gross income (AGI) must not exceed $109,000, with a phase-out starting at $100,000.

Claiming this deduction requires itemizing deductions on Schedule A of Form 1040. While MIPs increase monthly mortgage payments, the deduction can partially offset this cost. Buyers should weigh the impact of MIPs on their overall financing strategy. For example, increasing the down payment to 20% can eliminate MIPs entirely, potentially saving money over time.

Property Tax Deductions

Property taxes, which fund local services like schools and public safety, are deductible for homeowners. This deduction is also claimed on Schedule A of Form 1040. However, the Tax Cuts and Jobs Act of 2017 capped the deduction for state and local taxes (SALT), including property taxes, at $10,000 for married couples filing jointly and $5,000 for single filers. This cap limits the benefit for homeowners in areas with high property taxes.

To ensure compliance and claim the maximum allowable deduction, homeowners should maintain accurate records of property tax payments. These records are essential for proper tax planning and filing.

Recordkeeping for Tax Filing

Accurate recordkeeping is essential for homeowners claiming tax deductions. The IRS requires documentation to substantiate deductions, and failure to provide it can result in disallowed claims or penalties. Key documents include mortgage interest statements, property tax receipts, and settlement statements from the home purchase.

Form 1098, issued by the mortgage lender, details mortgage interest and points paid during the year. Property tax payments, often included in escrow, should also be tracked with receipts or bank statements. If points were paid at closing, the settlement statement (HUD-1 or Closing Disclosure) provides the necessary documentation.

Digital tools can simplify organization. Software like QuickBooks or spreadsheets can help categorize records, while scanning physical documents ensures they are preserved. The IRS can audit returns for up to three years, so homeowners should retain these records for at least that period. Staying organized reduces stress and ensures compliance during tax filing.