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How Does Buying A House Affect Your Taxes? Feature Image
Posted on March 31, 2022 6 minute read

How Does Buying A House Affect Your Taxes?


What's in this article?

Buying a house: What can I deduct from my taxes?
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How do I apply for a mortgage interest tax credit?
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Can I get a tax break on home office expenses?
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If you’re like most Americans, buying a house is the single most expensive purchase you’ll make in your lifetime. 

But did you know it can save you money on your income taxes?

Taxes can get confusing enough even without adding homeownership into the mix. 

Let’s dive into how exactly buying a house will affect your taxes. 

Buying a house: What can I deduct from my taxes?

If you’ve only ever rented, saving for a down payment might seem impossible, not to mention paying down your principal mortgage debt and interest for years—sometimes decades. 

But thanks to the breaks and deductions that homeowners are eligible for, you may be able to build that savings account back up. 

Private mortgage insurance

If you’re buying a home with less than 20% as a down payment, plan on paying for private mortgage insurance. 

Private mortgage insurance premiums are an additional payment on top of your regular monthly mortgage payments. 

Insurance premiums typically run between $40 to $75 monthly for every $100 of your mortgage (not including the amount of your down payment). Private mortgage insurance provides lenders protection from loss if a borrower stops making their monthly mortgage payments.

But they are tax deductible.

You can claim your total private mortgage insurance payments as a deduction on your tax return, depending on your income. 

If your adjusted gross income (income after adjustments such as interest you’ve paid on a student loan or contributions to a retirement account) is less than $100,000, you can claim this deduction.

If you’re married but filing separately, your adjusted gross income should be less than $50,000 to be eligible to claim the deduction.

If your adjusted gross income is more than $100,000—but not more than $109,000—(must be less than $54,500 if you’re married and filing separately), you can still claim partial private mortgage insurance as a deduction on your tax return.

Property taxes 

Whether you pay your local property taxes directly to your municipality or through a mortgage escrow account, you can deduct up to $10,000 of the money you paid for your property taxes during the previous taxation year. 

If you’re buying a home and your lender collects money on your behalf (in an escrow account) to pay taxes, you won’t be eligible to claim a tax deduction until your property taxes have actually been paid.

Mortgage interest

The Internal Revenue Service (IRS) allows homeowners to claim a mortgage interest deduction on their home loan.

A mortgage interest deduction allows homeowners to lower their taxable income, reducing the total taxes they have to pay. Many homeowners get a significant tax break from buying a house by deducting paid mortgage interest.

The deduction is for interest on a mortgage less than $750,000 for single homeowners, heads of household, or married filing jointly.

Married homeowners who file separately can each claim interest on a mortgage up to $375,000.

This deduction is most commonly used for primary residences, but eligible borrowers can use it for a second home as well.

Mortgage points

You can pay a portion of your mortgage interest upfront when you take out your mortgage loan. This upfront interest payment is referred to as paying “mortgage points.”

Prepaying mortgage interest like this allows you to reduce the amount of your monthly mortgage payment.

Mortgage points not only help shrink your mortgage payments, but you can claim them on your income taxes, reducing your taxable income.

How do I calculate mortgage points?

To get an estimate of how much of a mortgage points deduction you can claim, use the following calculation:

  • Each percent of your mortgage loan equals one mortgage point 
  • For every mortgage point you pay upfront, you will reduce your mortgage interest rate by between 0.125% and 0.250% (it can vary depending on the lender).

What if the seller paid the mortgage points as part of the closing costs?

If the seller paid your mortgage points as part of the closing costs, don’t despair. You can still claim a mortgage points deduction when filing your income tax return.

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How do I apply for a mortgage interest tax credit?

If you received a qualified Mortgage Credit Certificate (MCC) from the state or local government to subsidize the purchase of your primary residence, you are eligible to claim a mortgage interest tax credit. 

How Much Can I Claim?

If you have a qualified MCC, you are eligible to claim a dollar‐for‐dollar tax credit for a portion of interest paid on your mortgage, up to $2,000.

How is mortgage interest tax credit calculated?

The mortgage interest tax credit amount is between 10% and 50% of the mortgage interest you paid during the year.

What happens to unused tax credits?

If you don’t use it all this year, the Internal Revenue Service will allow you to “carry forward” any unused portion of your tax credit for up to three years.

Can I get a tax break on home office expenses?

If you are self-employed and work from home, the IRS allows you to claim home office expenses when you use your home for business reasons.

I live in a condo, can I still claim a home office deduction?

Good news! The home-office deduction doesn’t depend on the type of home you have—condo, townhouse, single-family residence, etc.

What are the main criteria for home office deductions?

To take advantage of this tax deduction, you’ll need to be able to show the IRS that you regularly use a part of your home exclusively for business.

Do you have a separate room or office where you work? Do you have a dedicated corner of a larger room that you only use for business reasons? If you answered yes, you can apply for this deduction.

Once you’ve established a dedicated workspace, you can deduct expenses for the business portion of specific bills, including

  • utility bills
  • home insurance costs
  • depreciation on your home

Do home office deductions apply to remote workers?

Unfortunately, the IRS only allows home office tax breaks for self-employed individuals who regularly work from home. The home office tax break doesn’t apply to employees working remotely for other companies.

Homefinity can help

There’s no way around it—buying a home is expensive. 

Mortgage debt and interest payments, not to mention saving for a down payment, can be daunting. But by taking advantage of these tax benefits when you file your tax return, you can put some of that money back in your bank account.

If you’re interested in buying a home, curious about appraisal or title fees, applying for a real estate tax deduction, or have any other questions about the home buying process, reach out to the home buying specialists at Homefinity today.

This article does not constitute tax advice. Please consult a tax advisor regarding your specific situation. This aricle does not constitute as specific property tax advice. Please consult a tax attorney or your local tax accessor’s office regarding your specific situation.