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Understand These Tax Breaks When Buying a Home

Tax Breaks for Homeownership - TaxAct

Buying a home can help lower your tax bill. In fact, tax breaks for homeownership are a primary motivation for many people to buy their own home.

To make sure you get the maximum benefit from your home purchase, however, it’s important to understand the potential tax benefits.

Keep these tax considerations in mind when you’re purchasing a home.

You can deduct the interest and property tax portions of your mortgage payment

Your house payment includes both interest and principal payments.

You may pay insurance and property tax payments to your mortgage holder, who in turn pays them when due. You may also pay other charges, most notably mortgage insurance premiums if required.

You can generally take a deduction for the interest you pay to your bank or other lender. You can also deduct the property tax your lender pays on your behalf.

Private mortgage insurance premiums are no longer deductible

Don’t count on deducting private mortgage insurance premiums.

If you’re buying a house now, you probably won’t be able to deduct them. Private mortgage insurance, or PMI, is coverage your lender may require you to buy if you have too little equity in your home, to protect the lender against your default.

The deduction for PMI originated in 2007, but expired at the end of 2014. Unless Congress renews this deduction, the 2014 tax year is the last it can be claimed.

Understand These Tax Breaks When Buying a Home - TaxAct blog

You can only take a deduction if you itemize deductions

Before you count on how much you’ll save in taxes by purchasing a house, consider how many other itemized deductions you take, and whether you itemize your deductions.

Even if you can itemize deductions after you buy a house, you may not save as much on your tax bill as you think. That’s because your total itemized deductions only reduce your taxes to the extent that they are greater than your standard deduction.

On the other hand, if you already itemized your deductions, or if you are close to being able to itemize your deductions already, you’ll receive the maximum benefit from your interest and property tax deductions.

Common itemized deductions include charitable contributions and state income tax.

You can also deduct items such as medical expenses and casualty losses, but to the extent they exceed fairly high “floors” for these deductions.

For 2014, the standard deductions by filing status are:

Filing Status Standard Deduction
Single or Married Filing Separately $6,200
Head of Household $9,100
Married Filing Jointly or Qualifying Widow(er) with dependent child $12,400

For 2015, the standard deductions by filing status are:

Filing Status Standard Deduction
Single or Married Filing Separately $6,300
Head of Household $9,250
Married Filing Jointly or Qualifying Widow(er) with dependent child $12,600

Your standard deduction is higher if you are age 65 or older, or if you are blind.

The more taxes you pay, the more homeowner tax breaks will probably help you

It’s hard to save much on your tax bill if you owe little or nothing to Uncle Sam in the first place.

That’s one reason young people don’t need to rush into buying a home – they can’t save on taxes they don’t owe. Tweet this

If you’re paying some federal income taxes, say you’re in the 15% tax bracket, every $100 that your mortgage or property tax deduction reduces your taxable income saves you $15.

That’s nice, but it’s hardly a motivation enough on its own for you to run out and buy a house.

If you’re in the 25% tax bracket, however, the benefits become more persuasive.

When you add the benefits of saving $25 in tax for every $100 you pay in mortgage interest and property taxes to the other benefits of homeownership, you may want to start shopping for houses.

Don’t forget to consider state income taxes, too.

And remember that you’re buying a home doesn’t just affect your taxes for this year and next. You’ll probably still be there as your income level and your tax bracket increase over the years.

Don’t overbuy a house for the tax benefits

The more you pay for a house, the higher your deductions for mortgage interest expense and property taxes. That doesn’t justify going out and buying too much house, however.

As we’ve seen in recent years, a house is a lousy investment if you can’t hang onto it.

Make sure you buy a house you can afford, without undue stress, even when things don’t always go as planned.

Consider all the reasons you want to buy a house

Buying a house can be a great way to build equity, and to eventually own it free and clear if you desire.

It protects you from having a landlord raise your rent or sell your home out from under you. It may feel more like home than a place you’re just renting, and you won’t have to ask permission to paint the kitchen any color you want.

The tax benefits of buying a house definitely help tip the scales toward homeownership, if that’s what you want. Tweet this

There’s no right answer to whether you should buy a house or keep renting, however.

Consider all the economic, as well as noneconomic reasons you’re thinking about buying a house before you make, what could be, one of the most important purchases in your life.

TaxAct makes preparing and filing your taxes quick, easy and affordable so you get your maximum refund. It’s the best deal in tax. Start free now or sign into your TaxAct Account.

Photo credit: Universal Pops (David) via photopin cc

About Sally Herigstad

Sally Herigstad is a certified public accountant and personal finance columnist and author of Help! I Can't Pay My Bills, Surviving a Financial Crisis (St. Martin's Griffin). She writes regularly at,,, RedPlum, and MSN Money. She is an experienced speaker and a member of Toastmasters International. Follow Sally on Twitter.

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