If you have just bought a new home or are about to, you definitely will be interested in finding ways to save as much as you can – including on taxes. Which raises the question, home buying tax deductible?
That’s a big question, and the answer breaks down into several more detailed areas. Here are the most important things you need to know about whether buying a new home can be deducted from your tax bill.
You Can Deduct Certain Mortgage Expenses
In general, you cannot simply deduct home-buying costs – but there are important exceptions that are tax-deductible. Some of these are mortgage-related.
First of all, you can usually deduct the “points” from a prepaid mortgage. Under the points system, the lender charges a fee of from one to three percent (one to three “points.”) This will add up to thousands of dollars, so it’s good to know that chunk of change is fully tax-deductible.
Under the Tax Cuts & Jobs Act, you can also deduct the interest paid on your home mortgage. That’s huge! While there is a cap of either $1 million or $750,000, most people will be able to deduct 100% of mortgage interest – and the interest is often as much or more than the cost of the home.
Also, you can deduct mortgage insurance premiums, and low-income home buyers may qualify for the mortgage tax credit deduction which allows them a tax credit of 20% of mortgage interest per year or up to a $2,000 limit.
Property Tax Deductions
When you buy and/or build a new home, you can also start deducting state and local taxes, especially property (real estate) taxes. Up until 2025, there is a $10,000 cap on this deduction which was introduced by the Tax Cuts & Jobs Act.
Being able to deduct taxes from your taxes may seem ironic, but it may add up to a deduction of thousands of dollars per year.
Deduct Home Equity Loan Interest
If you take out a home equity loan on your new home, you can also deduct the interest paid on that loan up to a limit of $100,000.
You may wish to use this kind of loan for further home improvements or to build a second home or improve a second home. This may be a way to build a new home or a vacation home and save some money while doing it!
Capital Gains Deductions / Exclusions
Finally, if you are selling your old home to move into your new one – very often the case, you can subtract all the home repair and home improvement costs you put into your old home over the years from the capital gains tax basis.
And if you qualify for a capital gains exclusion, you can keep the first $250,000 profit from selling your old home (or $500,000 if filing jointly as a married couple.)
Thus, while home buying is not technically an official tax-deductible activity, there are nonetheless ways to get deductions, credits, and other tax savings with buying a new home (and selling an existing home.)
To learn more about how you can reduce your tax bill when going through the home buying process, talk to your local tax professional, and then contact the professionals at Experience Homes in Amarillo, TX today to get you started with a new home!