Do You Get a Tax Break for Buying a House?

Purchasing a home is a significant milestone, offering financial benefits beyond building equity. In the United States, homeowners can take advantage of various tax breaks, making property ownership more financially appealing.

Understanding these tax incentives is crucial for maximizing savings and making informed decisions during the home-buying process. This article explores key tax deductions and exclusions associated with buying a home and their potential impact on your finances.

Mortgage Interest Deduction

The mortgage interest deduction is a major tax benefit, enabling homeowners to deduct interest paid on their mortgage from taxable income. This deduction can reduce federal income tax liability, making homeownership more financially attractive. Currently, homeowners can deduct interest on mortgage debt up to $750,000 for married couples filing jointly and $375,000 for single filers, limits established by the Tax Cuts and Jobs Act of 2017.

To qualify, the loan must be secured by a primary or secondary residence and used to buy, build, or improve the home. Interest on home equity loans or lines of credit is deductible only if used for these purposes. The deduction is claimed on Schedule A of Form 1040, requiring taxpayers to itemize. For 2024, the standard deduction is $27,700 for married couples filing jointly and $13,850 for single filers. Homeowners should evaluate whether itemizing provides greater tax savings than the standard deduction.

Property Tax Deductions

Homeowners can deduct property taxes paid to state and local governments from taxable income, offering financial relief, particularly in areas with high property taxes. 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, limits that remain for the 2024 tax year.

To claim this deduction, homeowners must itemize on Schedule A of Form 1040. The total of all itemized deductions must exceed the standard deduction for the property tax deduction to be beneficial.

Mortgage Points

Mortgage points, or discount points, allow homebuyers to prepay interest to lower their mortgage’s interest rate and monthly payments. This can be a smart financial move for those planning to stay in their home long-term, as the reduced rate can lead to significant savings over time.

For example, purchasing two points on a $300,000 mortgage might cost $6,000 upfront but could lower the interest rate by around 0.25% per point, depending on the lender. This reduction results in lower monthly payments, saving thousands over the mortgage term. Buyers should consider how long they plan to own the property, as the upfront cost of points is only worthwhile if they keep the home long enough to recoup the expense.

Mortgage points are generally deductible in the year paid if used for purchasing a primary residence. Points for refinancing must typically be amortized over the loan’s life. Consulting a tax professional is advisable to understand specific tax implications and ensure compliance with IRS rules.

Private Mortgage Insurance

Private Mortgage Insurance (PMI) is required for buyers who make a down payment of less than 20% of the home’s purchase price. While it protects lenders in case of default, the borrower bears the cost, which can range from 0.5% to 1% of the loan amount annually, adding to monthly expenses.

For instance, on a $200,000 mortgage, PMI could add between $1,000 and $2,000 per year. PMI is not permanent; borrowers can request cancellation once they reach 20% equity in their home, provided they meet lender and federal guidelines under the Homeowners Protection Act.

Capital Gains Exclusion

The capital gains exclusion is a significant tax benefit for homeowners selling a primary residence. It allows individuals to exclude a portion of the profit from the sale from taxable income. Single filers can exclude up to $250,000 of capital gains, while married couples filing jointly can exclude up to $500,000, provided they meet eligibility requirements.

To qualify, the homeowner must have owned and used the property as their primary residence for at least two of the five years preceding the sale. These two years do not need to be consecutive, offering flexibility for those who may have rented out their home or relocated.

The exclusion applies only to primary residences and cannot be used more than once within a two-year period. For example, if a married couple sells their home and realizes a $400,000 gain, they can exclude the entire amount from taxation if they meet the ownership and use requirements. Gains exceeding $500,000 are subject to capital gains tax, currently 15% or 20% depending on income level. This exclusion underscores the importance of strategic planning when selling a home to maximize tax savings.