- You can get money back after buying a house through deductions on your mortgage interest, property taxes, and mortgage insurance.
- Tax credits on things like energy efficiency improvements can also garner you higher returns.
- Your tax breaks for buying a house can depend on the local programs and options in your area, as well as your willingness to look for them!
How Much Money Do You Get Back In Taxes for Buying a House
There are plenty of benefits to becoming a homeowner. Want to add an accent wall to your room? Consult your own taste instead of your lease agreement. Want an island in your kitchen? Call a general contractor rather than your landlord of the rental property.
Welcome to a world where home improvements are an investment in your future rather than a debate with the homeowner.
But that’s not the only investment you can tap into—there are also property tax benefits.
When you buy a home, you can receive money back in the form of a tax return. So, if you’re trying to beef up your renovation piggy bank for that accent wall or kitchen island, let’s discuss how much money do you get back in taxes for buying a house.
Factors That Affect Your HomeBuying Tax Returns
There are a number of factors that determine how much money you receive in returns as a taxpayer, including:
- Your mortgage interest rate
- Whether you’re filing taxes as a single person or married couple filing jointly
- Where your property is located
- Your profession
However, how they affect your taxes can be through deduction or credits.
Tax Deductions vs Tax Credits
Tax deductions and credits are two ways you can get a tax break as a homeowner. Within those two categories there are different subtypes of both, and it can be confusing to understand what applies to you, the homeowner and taxpayer.
Below, we’ll discuss both tax groups, as well as some common tax breaks within each category.
Tax deductions lower the amount of your taxable income (also known as “gross income”) so that there’s less for the government to tax. Deductions are generally the go-to way for you to get money back from owning a home. Some of the more common deductions include:
- Mortgage interest
- Property taxes or real estate taxes
- Private Mortgage Insurance (PMI)
Let’s break down some of these deductions.
#1 Mortgage Interest Deductions
If you took out a mortgage to buy your new home, you’ll be able to deduct the interest on your federal income tax as long as you meet the following requirements:
- Your mortgage is for your principal residence, or a qualified second home
- Your deductions are itemized
- Your total mortgage debt totaled to $1,00,000 or less (or $500,00 if you’re married but you and your spouse filed separately)
Homes purchased after 2017 have a $750,000 cap on the interest you can deduct if you’re married and filing your returns jointly. A $375,000 cap on interest deductions exists for couples filing separately.
#2 Property Tax or Real Estate Tax Deductions
The amount you pay in property taxes to your state and local governments are also deductible. These amounts differ depending on where your house is located. Keep meticulous records if you paid property taxes directly, or be on the lookout for the 1098 form if you paid through an escrow account.
Property taxes can be a huge expense to you, but your state or local government might offer a tax break to help alleviate the cost and encourage homeownership.
#3 Point Deductions
Points, or “discounts points,” are fees you pay in order to get a mortgage on your house. They work essentially like prepaid interest, and you can deduct these charges for higher tax savings if your taxes are itemized.
You may have paid points when you received a new loan for your house or if you refinanced. Keep meticulous financial records during your home purchasing process for tax purposes.
#4 Private Mortgage Insurance (PMI) Deductions
If you placed a down payment of less than 20%, you will be charged for private mortgage insurance that’s also tax deductible. You’ll qualify for a PMI deduction if you meet the following requirements:
- Your loan was taken out in or after 2007
- If you’re single and your gross income is less than $50,000
- Or if you’re married and your gross income is less than $100,000
Tax Credits and How to Use Them
Tax credits reduce how much you actually owe to the government in taxes. Think of tax credits as a coupon or rebate you can cash in to reduce how much you owe. They’re generally more desirable than deductions because it reduces the amount you owe dollar for dollar.
That means that if you receive a tax credit for $600, you can subtract that exact amount from what you owe that tax year.
There are three basic types of tax credits:
- Nonrefundable tax credits – This credit can only reduce your tax liability to zero. Any amount leftover does not carry over to next year.
- Refundable tax credits – This credit pays out in full, which means if there’s money leftover in the credit after reducing your taxes to $0, you get a refund of the balance.
- Partially refundable tax credits – Part of these credits are refundable, so if you use the credit to reduce your tax liability to $0 and still have money leftover, you may receive part of it.
Tax credits may come from the federal or local government or other programs that want to help support homeowners for a variety of reasons. Let’s take a look at a couple different types of credits.
#1 First-Time Homebuyer Credits
While there is no longer an active federal tax program for first-time credits, there are still state and local programs that want to support people buying homes for the first time. If you are a first-time homebuyer, researching local credits on your own or with a financial advisor can be a fantastic way to shave off expenses.
You might also qualify for credits each tax year if you work in certain industries. The Good Neighbor Next Door program, for example, provides credits to:
- Emergency medical technicians
- Law enforcement
Check your state government website, or the Department of Housing and Urban Development for more options for homebuyers.
#2 Energy Tax Credits
What if you could make your home a more sustainable, energy-efficient place and also be rewarded for it in the form of tax savings? Energy credits incentivize home improvements that are energy-efficient by offsetting some of the costs.
For example, if you install alternative energy equipment, you might qualify for the Residential Renewable Energy Tax Credit. That includes:
- Solar panels or solar-powered water heaters
- Wind turbines
- Geothermal heat pumps
The Bottom Line on Tax Returns for New Homeowners
This crash course on tax returns for new homeowners is not extensive. Every state and local municipality will have different options for tax credit and tax deduction that you can take advantage of, and the average tax return after buying houses fluctuates. To that end, it’s important to do some research on your local area’s laws so you can handle your return like a tax pro..
While tax returns can feel like a maze, you don’t have to do it alone. Consider consulting a financial advisor to discover what sorts of tax breaks you might qualify for.
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Investopedia. Top Tax Advantages of a Buying a Home. https://www.investopedia.com/articles/personal-finance/051915/what-are-tax-advantages-when-buying-home.asp#citation-2
Investopedia. Tax Credit. https://www.investopedia.com/terms/t/taxcredit.asp
SmartAsset. What is the First-Time Homebuyer Credit? Does It Still Exist? https://smartasset.com/taxes/first-time-homebuyer-tax-credit
Intuit Turbotax. Energy Tax Credit: Which Home Improvements Qualify? https://turbotax.intuit.com/tax-tips/home-ownership/energy-tax-credit-which-home-improvements-qualify/L5rZH56ex