Tax Breaks for New Homeowners: What You Need to Know

Buying a new home is not just about acquiring property; it also opens the door to financial benefits that can impact your tax situation. For new homeowners, understanding these tax breaks is crucial as they can lead to substantial savings. These incentives encourage homeownership and ease the financial burden of purchasing a home.

Mortgage Interest Deduction

The mortgage interest deduction is a significant tax benefit for homeowners, allowing them to reduce taxable income by deducting interest paid on mortgage debt up to $750,000 for loans taken out after December 15, 2017. This applies to both primary and secondary residences. The limit was reduced from $1 million under the Tax Cuts and Jobs Act of 2017.

To qualify, homeowners must itemize deductions on Schedule A of their tax return. The total of all itemized deductions, including mortgage interest, must exceed the standard deduction to be advantageous. For the 2024 tax year, the standard deduction is $13,850 for single filers and $27,700 for married couples filing jointly. Homeowners should assess whether itemizing will result in greater tax savings than the standard deduction.

Interest on home equity loans or lines of credit may also be deductible if used to buy, build, or substantially improve the home securing the loan. Maintaining records of how borrowed funds are used is critical to substantiate claims during an audit.

Real Estate Taxes

Real estate taxes, or property taxes, are levied by local governments based on the assessed value of the property. These taxes fund community resources like schools and infrastructure.

Homeowners can deduct real estate taxes on their federal tax return, up to $10,000 ($5,000 for married individuals filing separately) for the total of state and local taxes (SALT), including property taxes. This limit was established by the Tax Cuts and Jobs Act of 2017. Accurate tracking and reporting of property tax payments are essential to maximize this deduction.

Understanding property tax assessments is also valuable. Assessments determine a property’s market value, and errors can lead to inflated tax bills. If the assessed value appears excessive, homeowners can appeal the assessment to potentially lower their tax liability.

Mortgage Insurance Premiums

Mortgage insurance premiums (MIPs) apply to homeowners with loans backed by the Federal Housing Administration (FHA). These premiums protect lenders and make it easier for borrowers to qualify for loans with lower down payments. Taxpayers with adjusted gross incomes (AGIs) up to $100,000 can deduct the full amount of their MIPs, with the deduction phasing out between $100,000 and $109,000.

Form 1098, issued by the lender, details the amount of mortgage insurance premiums paid during the tax year. Ensuring this form matches personal records is important to avoid IRS issues.

Deducting Discount Points

Discount points, prepaid interest on a mortgage, allow homeowners to secure lower interest rates by paying upfront fees at closing. Each point typically equals 1% of the loan amount. Discount points are deductible in the year they are paid if the mortgage is for a primary residence and specific conditions are met. For secondary homes or refinanced loans, the deduction is usually spread over the loan’s life. IRS Publication 936 provides detailed guidance on deducting home mortgage interest.

Residential Energy Credits

Residential energy credits reduce tax liability while promoting environmentally friendly practices. The Energy Efficient Home Improvement Credit allows homeowners to claim 30% of the cost of qualifying improvements, such as insulation or energy-efficient windows, capped at $1,200 annually with sub-limits for specific items.

The Residential Clean Energy Credit offers a more substantial benefit for renewable energy installations like solar panels, allowing homeowners to claim 30% of installation costs with no annual cap through 2032. Proper documentation, including receipts and manufacturer certifications, is essential for claiming these credits.

Mortgage Credit Certificates

Mortgage Credit Certificates (MCCs) benefit new homeowners with moderate or low incomes. Issued by state or local housing agencies, MCCs convert a portion of the mortgage interest paid into a non-refundable tax credit, directly reducing tax liability. The credit rate typically ranges from 10% to 50% of annual mortgage interest, with a maximum credit of $2,000 per year. Unused credits can often be carried forward for up to three years.

To claim the credit, homeowners must file IRS Form 8396 with their tax return and retain MCC documentation. Selling the home within nine years may trigger a recapture tax, depending on factors like income growth and property appreciation. Understanding these nuances helps homeowners maximize MCC benefits while avoiding potential pitfalls.