Home Buying Tax Deductions

Tax Deductions When Purchasing A Home

One of the major differences between owning a home and renting one is the allowable home buying tax deductions. The tax deductions can have a severe impact on the overall cost of comparing renting vs. buying. One of the advantages of owning a home is the tax savings benefits. If there is anything in this world that is certain, it’s the fact that everyone likes to save on their taxes when April rolls around. If you have home buying tax deductionspurchased a home in the last year, you are going to want to make sure that you have remembered all the allowable home buying tax deductions.

When taking out a mortgage to buy a home, there are certain home buying tax deductions that the IRS allows that you are going to need to remember. When purchasing real estate one of the questions Realtors get asked all the time is “what’s tax deductible?”.

The list below summarizes the deductions that many people forget about when buying Real Estate. While those that have owned a home before may be familiar with some of these tax deductions many first time home buyers are not. Don’t forget these tax deductions when buying a home!

Mortgage Points

Points paid when taking out a mortgage are tax deductible if they are used to reduce the mortgage interest rate. In the event you don’t know, a point is 1% of the loan amount. For example, on a $200,000 mortgage, a point would equal $2000.00.  Typically most people would not want to pay points on a loan unless the expectation was to be in the home for a while to recapture the cost of such points in the form of reduced payments.

To figure out if paying points make sense, you need to calculate the mortgage payment amount both with and without points. By looking at the spread between these numbers, you can determine how long you would need to be in the home before it would make fiscal sense to be paying points. For a complete explanation see when to pay points on a mortgage.

Points or origination fees paid when you buy a home, or other Real Estate are valid home buying tax deductions in full for the year that you pay them. It should be made clear that origination charges from the lender that constitute a “service fee” are not tax deductible.

Another method you could make is to amortize the points over the term of the mortgage. This choice is usually made only when your itemized deductions are less than the standard deduction for the year you purchased the home.

Additionally, when you refinance a mortgage, the points must be deducted over the term of the loan. If you deduct points over the duration of the loan and sell the home or refinance it again before the loan expires, you can deduct in the year of the sale or refinance any points that you didn’t previously deduct. Keep in mind that you will be able to get the best mortgage interest rates when you have a high credit score. See how to increase a credit score to help in your efforts to get a terrific interest rate.

Prorated Mortgage Interest

Another home buying tax deduction is prorated mortgage interest. When you are buying a home, depending on when in the month the house is closed, the buyer pays either a small or large amount of pro-rated mortgage interest for that month they close. This amount of prorated mortgage interest can be written off. The final  Real Estate settlement statement will show just how much the buyer is due.

Prorated Real Estate Taxes

Sometimes a seller will pay the local tax collector’s office for Real Estate taxes before the closing. In some circumstances, however, the buyer will pay a pro-rated portion of the taxes for the year at closing. This tax writes off when buying a home is one that not remembered quite often.

Construction Loan Interest For New Homes

As long as the construction period doesn’t last more than two years before you make the new home your “principal residence,” you can write off the interest for that new construction loan. This is another home buying tax break that often slips through the cracks.

Mortgage Prepayment Penalties

tax deductions when buying a homeIt is not all that common today to find mortgages with prepayment penalties. However, it is certainly not impossible to have one.  If your mortgage does include a prepayment penalty and you finish all the loan payments early, the penalties will be tax deductible. While not all that common it is still a tax break worth checking into.

Mortgage Insurance

If you got a loan in either 2007, 2008, or 2009 and got the mortgage through the Federal Housing Agency (FHA), Veterans Administration (VA) or the Rural Housing Agency (USDA loan) you may be able to deduct private mortgage insurance (as defined in section 2 of the Home Protection Act of 1998 as in effect Dec. 20, 2006). Prepaid mortgage insurance premiums usually must be deducted over the period to which they apply. Don’t forget about this home buying tax deduction if it applies to you!

Mortgage Interest Tax Deduction

From a tax perspective, one of the best features of owning a home or other Real Estate is the ability to claim a mortgage interest tax deduction on your tax return.  The mortgage interest deduction is often times one of the tax breaks that the government has tried to get rid of. Considering it is one of the best tax breaks afforded to homeowners getting rid of the deduction would not help Real Estate values if it were to be abolished.

Mortgage interest is tax deductible on mortgages  of up to 1 million dollars ($500,000 if married and you are filing separately) as long as you use the money to buy, improve, or build an addition on your home and the mortgage is secured by the property.

Additionally, the interest you pay on loans secured by your home and used for a purpose other than to buy, build or improve your home is tax deductible for loans up to $100,000 ($50,000 Married Filing Separately). In other words if you used a home equity line of credit to purchase a car the interest on this 2nd mortgage would be tax deductible as well. This is a home buying tax deduction you absolutely do not want to miss!

There are certainly some excellent tax deductions when purchasing a home you just need to remember them! Knowing what the tax deductions are when buying a home can save you a boatload of money.

More Home Buying Tax Deductions Resources

Use these additional resources to help figure out your tax deductions when buying a home. Missing important tax write offs can cost you lots of money if you don’t stay familiar with the most up to date laws!

About the author: The above Real Estate information on home buying tax deductions was provided by Bill Gassett, a Nationally recognized leader in his field. Bill can be reached via email at [email protected] or by phone at 508-625-0191. Bill has helped people move in and out of many Metrowest towns for the last 29+ Years.

Thinking of selling your home? I have a passion for Real Estate and love to share my marketing expertise!

I service Real Estate sales in the following Metrowest MA towns: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton and Uxbridge MA.

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  1. carole deschine says

    Bill, thank you for the helpful information. I noticed the information is useful for entering into a mortgage. I have been considering buying a home but I don’t want to enter into a mortgage contract. I am 55 years old and retired after working 28 years at the same company. Bill, suppose if I purchase a home with a lump sum cash payment to close the transaction. Is there any tax deduction for a transaction like that?

    • says

      Carole – thanks for your compliments on my article on tax deductions when buying a home. One of the benefits of owning a home are the tax deductions that you get from having a mortgage. Unfortunately paying cash does not afford you with those same benefits.

  2. says

    Thanks for the reminder. I always remember mortgage interest and real estate taxes. These are easy to remember because the lender summarizes these on its year-end statement. (R.E. taxes are only included when you escrow your taxes.) I forget about points and, fortunately, have never had to worry about pre-payment penalties. I’m glad you included details on determining the deductible amount for points because that calculation is rarely straight-forward!

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