If you’ve been considering buying a home for any length of time, you’ve likely already discovered that the upfront costs can be expensive. Down payments, closing costs, moving and more all add up quickly. But what about the tax benefits of owning a home in 2019, do these tax advantages still exist? Absolutely! Although some have expired, or been adjusted recently, there are still many potential tax benefits of owning a home in 2019.
The first-time home buyer tax credit
You may have heard of this tax credit or know someone who benefited from it. This tax credit for buying a house was a great incentive, during a tough economic time, but unfortunately, it no longer exists for new buyers in 2019.
In 2008, buying a home was incredibly difficult if not impossible for many first-time home buyers. The housing crisis and economic downturn were forcing people out of their homes in most cases, and first-time home buyer tax credit was the Government’s response under the Housing Economic and Recovery Act. Designed to help in a tough time, the incentive was created with the intent of restoring some faith in the American dream of buying a home, and in the lenders themselves. Imagine watching your family, colleagues and friends lose their home, face foreclosure and not know where to go. In many cases, eviction was compounded with how difficult it was to find a job. It wasn’t exactly the time you would be thinking, “Wow, it must be great to be a homeowner.”
The American people needed a little incentive, and that’s exactly what the government offered. If you qualified during this time, you would be eligible to get a credit, in some cases as high as $8,000. A serious help towards all those costs you had to pay to get into your new home.
Why did this credit expire?
As the economy started to improve, this act and incentive expired, officially ending the credit on April 30th, 2010. There is one caveat to this, however. If you happened to buy a home before September 30th, 2010 and never applied for the credit, you might still be eligible to receive it. Check with a tax professional to see if you qualify and to file the necessary documents.
Let’s focus on what IS around today…
Residential energy credit
If you already own a home and have recently invested in making it more energy efficient, you could be in luck. The Residential Energy Credit is a great tax advantage (you should jump on) of owning a home. Here’s how it works.
If you have invested in solar panels or heaters, wind turbines, geothermal heat pumps, fuel cells and more, you may qualify. The credit for most items is 30% of your total cost, meaning if you spent $1,000 on these items and are approved for the credit, it’s worth $300.
Other items were approved in the past, such as certain roof materials, home insulation, doors, windows, etc. that were designed to improve your home’s energy efficiency. If you installed those under qualifying years but didn’t apply for the credit, you may wish to check with your tax professional to see if it’s too late to submit an application.
No matter what improvements you make, keep excellent records and check in advance with contractors to be sure they meet certain guidelines that may be required by the government to qualify. If you don’t know exactly how to make sure your project will get approved, seek out a tax expert to help answer any questions before you get started.
Historical preservation credits
These credits are much less common than others, but they are out there if you’re living (or planning on buying) a property with historic value. Internal Revenue Code identifies these properties through the National Register of Historic Places. Meaning, if you have a certified historic structure or historically important land area that “contributed to the historic significance of that district,” you may be able to apply for a credit. Typically, a credit is granted in cases where you offer a voluntary easement for public benefit, in the form of a deed. Because these credits are not as common as others and follow specific limitations and rules, it’s best to work with a professional accountant or tax attorney if you think you may qualify.
The good news is that beyond credits, there are many tax benefits for buying and owning a house, in the form of deductions.
What is the difference? A tax credit may be a fixed amount or percentage that reduces your bill to the IRS by that flat amount. A tax deduction reduces your tax bill too but varies depending on your tax bracket.
Here are some things you may be able to deduct as soon as you close on your first home.
Mortgage and interest deductions
Remember all that interest you agreed to pay to your mortgage lender? It’s the reason your principal amount doesn’t seem to go down very fast after you sign on that dotted line. Most lenders require interest to be paid first (as a way of protecting them if you stop making payments later), which means much of what you pay during those first few years of your mortgage won’t make a big difference in the overall amount you signed up for. The good news is, you will get a tax benefit for all those payments.
The benefit comes in the form of a home mortgage interest deduction. At the end of any year you make payments, your mortgage lender will provide you a form that shows how much interest you paid during the previous 12 months. The form they’ll send you is called a 1098 and you’ll be able to use it when you file your taxes, reducing the amount you owe!
If you paid points to buy your home, you will see that on your settlement statement or on the same 1098 and you’ll be able to get a deduction in most cases for those points too. If you recall from other blogs (or want to learn more about it here), you may pay points when you close to get a better interest rate. It’s paying more up front to “buy” a better interest rate. If you aren’t sure exactly how to deduct these, you guessed it, consult an expert. These credits can be one of your biggest deductions, so you definitely want to take advantage of them!
Primary Mortgage Insurance (or PMI)
Did you put less than 20% down when you purchased your home? If so, you’re likely paying primary mortgage insurance. Traditional lenders require PMI because it protects their interest in the property, should you default. That’s right, you’re paying premiums for them to have insurance. The good news is that in most cases, you can get rid of PMI once you have 20% equity (aka you have paid 20% of the total home’s value to the lender) and you can deduct it in the meantime!
You’ll receive information on the PMI that you paid from your lender, just like other interest statements we discussed above. There are different exceptions that apply for this deduction, like taking your income into account, but don’t skip this deduction if you’re eligible. And if you’d like to learn more about PMI and how it affects your mortgage, you can visit our take on the subject here.
A tax deduction for paying taxes? We like it! You’ll likely pay local and state taxes at closing and you’ll continue for as long as you own the home. The good news is that you will be eligible for a tax deduction for both of those payments!
Look to your closing documents and settlement statement for the year you bought your home. If you use an escrow account through your lender, you’ll also receive details to deduct the ongoing tax payments from them.
In case you’re not familiar with an escrow account, it’s simply a way your lender ensures you’re paying mortgage insurance and property taxes. After all, they may be on the hook if you stop paying either!
An escrow account also makes it very simple for you to manage your mortgage and avoid large payments at one time. Both home insurance and annual property taxes are due at one time. If each is $1,200 a year, you could owe a $2,400 bill all in one month. Instead, with an escrow account, your mortgage payment would be $200 extra a month and the mortgage company would pay the bill when due. The following year, if property taxes and insurance went up or down, you may see the amount you pay into escrow do the same.
Loan origination fees or points
You likely paid one or both of these costs when you closed on your home. And good news, because these are deductible too! These items typically fall under mortgage interest costs, which as we already discussed are eligible. The difference here is that these are one-time costs, so you’ll only be able to deduct them the year that you closed. Look to your settlement statement and closing documents for the total amount you paid and be sure to let your tax advisor know that you bought a home that year!
Now that we’ve covered all the great items to deduct as a homeowner, it may be time to touch on the items that won’t pass muster with the IRS.
The principal amount of your home is the actual amount you agreed to buy the asset for. And just like rent, it’s not deductible. The home is your property (at least it will be as soon as you finish all those payments to the bank!) so the IRS doesn’t give you a discount for making the principal payments of your new digs.
Any lender will require that you have homeowner’s insurance. After all, they’re using your home as collateral for their money so having it destroyed before you’ve paid it off isn’t what they had in mind. But even after you’ve paid off your mortgage, this insurance is critical to protect your investment. The one thing it’s not is tax deductible.
Fire insurance follows the same rules as your standard homeowner’s coverage and is not deductible. However, it may still be a critical part of your overall protection.
Whether you’re just getting started as a homeowner or have had your home for a little while, these tax advantages – both deductions and credits – are some of the great benefits of owning a home. Do your research on what we’ve included here, as well as what comes out. Tax laws can change quickly, as we saw with the first-time homebuyer credit, so never be afraid to hire a professional that stays up to speed.