5 tax benefits all first-time homebuyers should know

Young homeowner reviewing personal finances with calculator and laptop

You may have heard that the tax benefit of buying a home is one of the many advantages of homeownership vs. renting. Despite recent tax law changes, tax breaks for first-time homebuyers still exist in the form of deductions and credits. What’s the difference between the two? Tax deductions are expenses subtracted from your income before you figure out the amount of tax you owe. Tax credits are subtracted from the amount of tax you owe. Both can save you money. Here are five of the top tax benefits for first-time homebuyers that you won’t want to overlook.

  1. Mortgage interest deduction

For those homeowners who itemize, the mortgage interest deduction can be a significant tax perk. That’s because it can reduce your taxable income by deducting the interest paid on a home mortgage. While the number of taxpayers who take this deduction has fallen in recent years, the Tax Policy Center estimates that 14 million homeowners took advantage of this tax break in 2018.1

  1. Mortgage points tax deduction

“Points” are essentially one-time, pre-paid interest charges on your loan. The more points you pay, the lower the interest rate on the loan, which can reduce your monthly mortgage payments. Borrowers typically can pay anywhere from zero to 3 or 4 points, depending on how much they want to buy down their rates. Discount points may be tax-deductible as home mortgage interest if you itemize your deductions. In addition, according to the Tax Information for Homeowners published by the IRS, “The buyer may deduct points paid by the seller, provided the buyer subtracts the amount from the basis or cost of the residence.” 2 Cost basis is the original value or purchase price of the property.

  1. Property tax deduction

A property tax is a tax assessed on real estate by your local government, usually based on the value of the property you own. Property tax revenue pays for roads, schools, libraries, snow removal and other municipal services. After you close your loan, you may be eligible for a property tax exemption or discount depending on where you live. Colorado offers property tax exemptions to the disabled. In Alaska, some seniors qualify for a dollar amount exemption. A disabled veteran in Arkansas may receive a full property tax exemption. Not all states offer the same tax relief, so it pays to research the options available and the qualifications for your state. Once you’ve learned more about the laws in your state, contact your county and file for an exemption or discount as soon as possible.

  1. Residential renewable energy tax credits

This federal tax credit may be an incentive to those homeowners looking to make improvements designed to boost energy efficiency. Geothermal, wind, solar and fuel cell energy systems may be eligible. Read more on the tax credit amount, requirements and qualifications.

  1. Home improvement tax deduction

While you may know that certain home renovations increase the value of your home, did you know that some improvements can lower your tax bill when you decide to sell your home? That’s because the IRS lets you add capital improvement expenses to the original value or purchase price of your property, reducing the size of the capital gain when selling.3 The National Association of Realtors notes that this tax benefit doesn’t come into play for everyone, “But if you plan to live in your house for a long time or make lots of upgrades, saving receipts could be a smart move.”4 Some examples of eligible improvements include a new roof, heating and air conditioning systems, attic insulation and a kitchen modernization. “A rule of thumb: A capital improvement increases your home’s value, while a non-eligible repair just returns something to its original condition. According to the IRS, capital improvements have to last for more than one year and add value to your home, prolong its life, or adapt it to new uses.”5

Property tax deductions and energy tax credits are just a few of the tax benefits of buying a house. You may also be eligible for other tax breaks such as a home office expense deduction or deductions for medically necessary home improvements. To make sure you don’t miss ways to reduce your tax liability, consult a tax professional regarding your specific tax implications.

Guild Mortgage has more than 1,000 loan officers standing by to answer your questions and guide you through the homebuying process. Search by your location to find the Guild Mortgage branch near you.

The above information is for educational purposes only. All information, loan programs and interest rates are subject to change without notice. All loans subject to underwriter approval. Terms and conditions apply. Always consult an accountant or tax advisor for full eligibility requirements on tax deduction.

1Chipping away at the mortgage deduction – The Brookings Institution

2Topic No. 504 Home Mortgage Points – IRS.gov

3Are Home Improvements Tax Deductible? –houselogic by REALTORS

4Are Home Improvements Tax Deductible? –houselogic by REALTORS

5Are Home Improvements Tax Deductible? –houselogic by REALTORS