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Understand These Tax Breaks When Buying a Home

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 get the maximum tax benefit from your home purchase, it’s important to understand what’s available to you.

Keep these tax considerations in mind when you purchase a home.

The interest and property tax portions of your mortgage payment are deductible

Your house payment includes both interest and principal payments.

You may also pay insurance and property tax payments to your mortgage holder. They, in turn, pay those amounts to the appropriate entity when they’re due. When required, you may also pay other charges, like insurance premiums.

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

Private mortgage insurance premiums are deductible

Private mortgage insurance (PMI) is coverage your lender may require you to buy if you have too little equity in your home. It protects the lender against your default. If you itemize and the insurance contract was issued after 2006, you can deduct the amount of your PMI.

However, once your adjusted gross income exceeds $100,000, the deduction is reduced ($50,000 for married filing separately). And once your AGI goes beyond $109,000, the deduction is eliminated entirely ($54,500 if married filing separately).

It’s also important to keep in mind that your total itemized deductions only reduce your taxes to the extent that they are greater than your standard deduction. Check out more mortgage tips.

For 2017, the standard deductions by filing status are:

Filing Status Standard Deduction
Single or Married Filing Separately $6,350
Head of Household $9,350
Married Filing Jointly or Qualifying Widow(er) with dependent child $12,700

For 2018, the standard deductions by filing status are:

Filing Status Standard Deduction
Single or Married Filing Separately $6,500
Head of Household $9,550
Married Filing Jointly or Qualifying Widow(er) with dependent child $13,000

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

The more taxes you pay, the tax benefits of owning a home you get

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 in the 15 percent tax bracket, every $100 that your mortgage or property tax deduction reduces your taxable income saves you $15.

While that’s nice, it’s not enough motivation to run out and buy a house.

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

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

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

And remember buying a home doesn’t just affect your taxes for this year and the next. It’ll likely benefit you for years to come.

Don’t overbuy a house for the tax benefits

The price tag on your home determines the amount you’ll pay in mortgage interest and property taxes. The more you pay, the higher your deductions will be.

However, that doesn’t justify going out and buying a house extremely outside of your budget.

If you can’t hang on to the house by making the payments each month, it then becomes a not so great investment.

Make sure you buy a house you can afford without undue stress.

Consider all the reasons you want to buy a house

Buying a house can be a great way to build equity and eventually own a property free and clear.

It protects you from having a landlord raise your rent or sell your home out from under you. Plus, not having to rent a place makes any house feel more like your “home”. It’s always nice to not 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 and noneconomic reasons you want to buy a house before you sign the dotted line. The choice to purchase a home is one of the most important decisions of your financial life.


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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