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You Got This Weekly Series: What are the Tax Benefits of Purchasing a Home?

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Each week we will answer one of the most frequently asked questions on FacebookTwitter and TaxACT’s Blog in the “You Got This” Weekly Series.


I am thinking of buying a new home. What are the tax benefits?

Anna via Facebook


Purchasing a home is a major life decision and there are numerous things to consider in your decision-making process. Those considerations should include the benefits on your tax return both now and in the future.

Here are 7 tax benefits of purchasing a home.

1. Mortgage Interest

Most people do not have the luxury of purchasing a house outright. Generally, most buyers obtain a mortgage loan to buy a new home.

Each mortgage payment is part interest, part principal. The interest paid over the course of a year is deductible for taxpayers who itemize their deductions. You should receive Form 1098 from your financial institution with the total mortgage interest paid during the tax year. You can then claim the interest paid as an itemized deduction on your tax return (on Schedule A).

2. Real Estate Taxes (Property Taxes)

Similar to the mortgage interest deduction, you can also claim any real estate taxes (property taxes) as an itemized deduction.

In the year of purchase, you may have paid these taxes at closing. Otherwise, these taxes are generally paid during the year directly or through an escrow account.

If your banking institution makes this payment on your behalf, this information will be reported on your Form 1098.

3. Qualified Mortgage Insurance Premiums

Some homebuyers need to obtain mortgage insurance in order to purchase their home. This insurance protects the lender in case the borrower defaults on the loan.

If you are required to purchase mortgage insurance, the premiums you pay throughout the year may be an itemized deduction.

4. Exclusion of Gain on the Sale

When you sell your main home, the IRS allows all or some of the gain on the sale to be excluded from income.

If you meet the IRS’ ownership and use tests, you can claim an exclusion of up to $250,000 ($500,000 for joint filers) for the gain on the sale of your main home.

5. Home Improvements

In general, you cannot deduct costs incurred for home improvements. However, home improvements can increase the basis of your home, which will factor into the sale of your home.

The basis of your home is generally the amount you paid for the house. This amount is used to determine any gain or loss that applies after selling your home by taking the difference between the sales proceeds and your basis.

By keeping track of any home improvements, you can increase your home’s basis as improvements are made. At the time of sale, your basis is more than just your initial purchase price. This will then reduce any gain attributable to the sale of your home.

For example, John purchases a home for $125,000 (his basis) and sells the home for $200,000. This would normally calculate a gain of $75,000.

However, while John owned the home he added some landscaping totaling $10,000. John increased his basis by $10,000. Therefore, when John sold the home for $200,000, he incurred a gain of $65,000 because his basis is $135,000, and not $125,000.

6. Tax Credits

While most home improvements cannot be claimed as a deduction on your tax return, some improvements may result in a tax credit.

Making your home more energy efficient could increase your refund. The residential energy efficient property credit is worth up to 30% of the cost of any qualified property.

7. Penalty-Free IRA Disbursement

If you are purchasing your first home, you can take a distribution from an individual retirement account (IRA) without being subject to the 10% early withdrawal penalty.

This exception applies to a distribution of up to $10,000 used to buy, build or rebuild your first home.

First-time homebuyers are considered anyone that did not own a home during the 2-year period prior to the acquisition date.

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