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Unlocking the Hidden Tax Benefits of First Time Home Buyers

tax benefits first home

First-time home buying is a milestone, and like with any major investment, it comes with myriad challenges. Numerous costs are involved in your first home ownership, from the downpayment to running your home. While these costs might look overbearing, there’s no denying the benefits of owning your own home. Home ownership’s often overlooked advantage is the potential for significant tax savings. 

The Internal Revenue Service (IRS) provides several tax breaks to reduce the substantial costs of buying and owning a home. After investing so much into your first home, you need financial relief to make your dream of owning a home more affordable. 

In this article, we’ll explore the tax benefits available to first-time homebuyers and provide tips on maximizing these tax deductions.

Tax Benefits of First Time Home Buyers: What You Need to Know

Buying and maintaining your first home demands significant financial investment. You have to pay a down payment, lender fees, costs of an appraisal, title insurance, origination fee, inspections, moving costs, property taxes, and insurance. Other costs that add up to homeownership include HOA fees, utilities, maintenance, and repair costs. 

Tax deductions are available for first-time homebuyers. As a first-time homebuyer, you may be eligible for several tax benefits designed to encourage homeownership, stimulate the housing market, and make it easier for individuals and families to achieve the dream of owning their homes. 

Tax breaks offered by the IRS can save you thousands of dollars and make your first home more affordable. As a first-time home buyer, learning how the tax breaks work helps you maximize your savings yearly. You know what and how to itemize the deductions when filing your taxes. The tax deduction reduces how much tax you owe but only applies if you itemize. 

Below is a discussion of tax deductions you can leverage to maximize your first-time homeownership

  1. Mortgage Interest Deduction

The mortgage interest deduction (MID) allows you to deduct the interest paid on your mortgage from your taxable income, saving you thousands of dollars each year. To qualify for this deduction, you must itemize your deductions on your tax return and have a mortgage on a primary or secondary residence. Initially, the interest deduction was up to $1 million in mortgage interest. Still, the Tax Cuts and Jobs Act (TCJA) reduced this to the first $750,000 in principal value if you’re a single filer or a married couple filing jointly. 

The mortgage interest deduction is particularly valuable in the early years of homeownership when most of your monthly mortgage payments go towards interest rather than the principal. Of course, as you continue to pay down your mortgage, the amount of interest you pay decreases, and so does the value of the mortgage interest deduction. However, during those first few years, this deduction can provide substantial savings that can help make home ownership more affordable.

  1. Property Tax Deductions

Property taxes are applied at a state and local level and are a significant expense for homeowners. However, property tax deduction on your taxable income offers a huge financial relief. To claim this deduction, you must itemize your deductions on your tax return and have paid property taxes during the tax year.

Keep in mind that there are limits to the amount of property taxes you can deduct. As part of the Tax Cuts and Jobs Act, the total amount of state and local taxes (including property taxes) that you can deduct is capped at $10,000 ($5,000 if married filing separately). 

Even with this limitation, the property tax deduction can still provide valuable savings for first-time homebuyers. For instance, in 2019, the Office of Tax Analysis (OTA) estimated property tax deductions saved millions of homeowners a total of $6 billion in income tax.

  1. Home Office Deductions

The third edition of McKinsey’s American Opportunity Survey shows more Americans have embraced flexible work, including working from home. As a first-time homebuyer, you are most likely looking for a home with dedicated office space. If you use a portion of your home exclusively for business purposes, you may be eligible for the home office deduction. 

The home office deduction allows you to deduct a portion of your home expenses, such as mortgage interest, property taxes, utilities, and maintenance, based on the percentage of your home used for business.

To qualify for the home office deduction, you must meet specific requirements set forth by the IRS. The main requirement is to use your home office exclusively and regularly for self-employment. In addition, the home office area must be your principal place of business or where you meet with clients or customers. 

The amount deductible depends on the percentage of your home dedicated to your work. Be sure to carefully review the IRS guidelines and consult a tax professional to determine if you qualify for the home office deduction.

  1. Energy-Efficiency Tax Credits

Investing in energy-efficient upgrades allows you to save money through tax deductions as a first-time homeowner. Such upgrades save you money on your utility bills and provide valuable tax credits for renewable energy and energy-efficiency home improvements. 

The Energy Efficient Home Improvement energy tax credit, is one example of renewable energy tax credit and equals 30% of certain qualified expenses such as energy efficiency improvements such as exterior doors, skylights, residential energy property expenses, and home energy audits. 

The Residential Clean Energy (RCE) Credit, on the other hand, provides tax credits if you buy qualifying equipment for your first home, including solar, wind, geothermal and fuel-cell technology. Some kits that qualify under RCE include geothermal heat pumps, solar panels or photovoltaics, solar-powered water heaters for home use, and wind turbines (generating up to 100 kilowatts of electricity for your home). 

Keep researching available credits and incentives in your area because of the regular updates. Your real estate agent or tax professional can update you on these tax credits. 

  1. Capital Gains Tax Exclusion

While the primary goal of first-time home buying is to find a place to call home, it’s also an investment with the potential for significant financial growth. When you eventually sell your home, any profits you make (known as capital gains) are subject to capital gains tax. However, as a homeowner, you may be eligible for the capital gains tax exclusion, which allows you to exclude a portion of your gains from being taxed.

To qualify for this exclusion, you must have owned and used the home as your primary residence for at least two of the five years leading up to the sale. If you meet these requirements, you can exclude up to $250,000 ($500,000 for married couples filing jointly) of your capital gains from your taxable income. This tax perk can provide significant savings and help you keep more of your hard-earned money when it’s time to sell your home.

  1. Other Tax Deductions

Other tax deductions include origination fees/points, Private Mortgage Insurance (PMI), medical expenses tax deductions, moving expenses that are not tax deductible for members of the armed forces, and state and local tax (SALT) deductions. A tax consultant or your accountant evaluates your home ownership to determine which of these additional tax benefits you qualify for. 

How to Maximize Tax Benefits As a First-Time Homebuyer

With this insight into various tax benefits available to first-time homebuyers, it’s easy to appreciate the incredible savings you can enjoy. To maximize these savings, here are some tips:

  1. Documentation/records: Keep detailed home expenses records, including mortgage interest, property taxes, and energy-efficient upgrades. These will be invaluable when preparing your tax return and claiming your deductions and credits.
  2. Professional expertise: Consult with a tax professional familiar with the tax benefits available to first-time homebuyers. They can help you navigate the complex tax code and ensure you take advantage of every available tax break.
  3. Smart home upgrades: Focus on energy-efficient upgrades that qualify for tax credits, and create a dedicated home office space if you work from home.
  4. Plan for the future: Consider the capital gains tax exclusion when deciding how long to live in your home and when to sell. You can save thousands of dollars in capital gains tax by timing your sale to meet the exclusion requirements.

Frequently Asked Questions about Tax Perks for First-Time Homebuyers

  • Do I have to itemize my deductions to claim these tax benefits?

Yes, most of the tax benefits discussed in this article, such as the mortgage interest and property tax deductions, require you to itemize your deductions on your tax return. Consult a tax professional to determine if itemizing is the best option for your financial situation.

  • Are there any income limits for these tax benefits?

Some tax benefits, like the Residential Energy Efficient Property Credit, do not have income limits. However, other tax deductions and credits may be subject to income limitations or phase-outs. Therefore, consulting with a tax professional is essential to determine if you qualify for specific tax benefits based on your income.

  • What if I purchased my home with a spouse or partner? How do we split the tax benefits?

If you purchased your home with a spouse or partner and both of your names are on the mortgage, you can typically split the tax benefits according to the percentage of the mortgage each person is responsible for. Consult with a tax professional to determine the best approach for claiming tax benefits.

Final Thoughts

First-time home buying can be financially draining, but it is a sacrifice worth making. With these tax benefits, you can get some relief and enjoy your dream of homeownership. Working with a tax professional allows you to identify and leverage all tax deductions available to first-time homeowners. These tax benefits can save you thousands of dollars which can go into other investments. This is one more reason to invest in your own home. 

As you embark on your first-time home-buying journey, you must educate yourself on every aspect of the process, including the tax perks and potential savings. So reserve your spot now for the best first-time home-buying course in town and gain valuable insights, tips, and resources to help you navigate the world of homeownership and make the most of your investment.

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