Can You Get a Tax Break for Buying a House?

Update: Due to the pandemic, the IRS has extended the tax deadline for the 2020 tax year from April 15, 2021 to May 17, 2021. This only applies to individual federal income returns and tax payments, not a state’s income tax deadline, including state payments or deposits. 

After a long year, tax season is finally upon us. You’re probably getting all your ducks in a row—collecting all the information you need, choosing a tax software to use, etc. If you’re a homeowner, you might be able to catch a few tax breaks—but can you get a tax break for buying a house?

If you itemize your deductions via Schedule A rather than claiming the standard deduction, you could be eligible for one or more home-related tax breaks. And if you work from home, you might be able to claim a home office deduction (more on that later). The information below is general information regarding these deductions. It is always best to consult a tax professional or use tax software to help guide you through your own personal situation.

Made a law in 2017, the Tax Cuts and Jobs Act amounted to the biggest tax overhaul since 1986. It removed or reduced some of the benefits available to homeowners under the previous tax code, but kept others in place, including:

N.B. The PMI deduction originally ended in 2017, but the Mortgage Insurance Tax Deduction Act of 2019 made it a permanent fixture on the tax break roster.

Deductions Versus Credits

Many people mistake deductions for credits—but they’re not the same thing. Let’s take a closer look at both types of tax break:

Deduction

Deductions reduce your taxable income according to the highest federal income tax bracket you fall into. So, if you’re in the 22% income tax bracket and qualify for a $2,000 deduction, you’ll save $440.

Credit

Credits lower your income tax liability by a fixed dollar amount. If you qualify for a $500 tax credit, you pay $500 less in taxes.

Good to know: Some tax credits are nonrefundable, so if you don’t owe a lot of tax to begin with, you don’t qualify for the entire credit. Other tax credits, like the Earned Income Tax Credit, are refundable, so you get the entire amount under any tax circumstances.  The remaining amount of credit available that wasn’t needed to pay down your tax bill comes to you in your tax refund.

Hot Tax Tips for 2021

Some homeowner tax breaks changed as a result of the 2017 tax reform, but many remained the same. Let’s look at two savvy money-saving tips for 2021.

Energy Efficient Modifications

First, the bad news—most home improvements aren’t tax deductible. The good news is that some of the best energy-efficiency updates you can make to your home are tax deductible, including:

  • Geothermal heat pumps
  • Solar panels
  • Small wind turbines
  • Solar water heaters
  • Green fuel cells

Specific energy-saving improvements you make to your property before December 31st, 2021, could qualify for the Renewable Energy Tax Credit. You’ll get a 26% credit for installations between December 31st, 2019, and January 1st, 2021, and a 22% credit for systems placed into service between December 31st, 2020, and January 1st, 2022.

If you make changes to your home for medical reasons, these might also be deductible under the medical expense tax deduction—but only if they exceed 7.5% of your adjusted gross income.

Top Tax Credits for Buying a House in 2020

If you itemize your deductions, there are several homeownership deductions available.  Here are four of the biggest tax breaks for homeowners.

Home Mortgage Interest Deduction

Arguably the most well known tax break for homeowners, the home mortgage interest deduction (HMID) lets you deduct interest paid on your mortgage. Before December 15th, 2017, the maximum HMID mortgage amount was $1 million.   After that date, the maximum HMID mortgage amount fell to $750,000 for single filers and those married filing jointly. Married taxpayers filing separately can deduct up to $375,000 each.

Property Tax Deduction

Do you pay property taxes monthly or yearly? In either case, both state and federal property taxes are tax deductible on your federal return. Under the Tax Cuts and Jobs Actrules, the deduction amount is capped at $10,000 for married couples filing jointly and $5,000 for other tax statuses. Before 2017, there wasn’t an upper limit on the amount you could claim.

You can also claim taxes paid at closing when you buy or sell your home and certain payments made to town or county tax assessors. You can’t claim taxes paid on commercial property or rental property, however.

PMI Deduction

Not all homeowners pay private mortgage insurance (PMI)—but if you do, you might be able to claim it as a deduction. Generally speaking, most PMI policyholders have less than 20% equity in their properties. Usually, you’ll pay between 0.5 and 2% of your loan amount annually—so if you have a $200,000 mortgage, you’ll pay up to $4,000 per year for PMI.

If you have an adjusted gross income of under $100,000, you can claim the PMI deduction in full. Once your AGI goes over $100,000, the deduction amount begins to phase out—and it disappears completely when you hit the $109,000 AGI mark.

Home Office Deduction

If you’re self employed and you work from home, you can claim a home office deduction. To do so, you have to be able to prove that you’ve used a portion of your home exclusively for business purposes. In other words, your office, or another “separately identifiable space” counts, but your bedroom doesn’t—even if you work on your laptop in bed. Voluntary, occasional or incidental freelance work won’t entitle you to a home office deduction.

There are occasions where you don’t need to meet the exclusive-use test. These include:

  • If you use part of your home as a daycare facility for children, special needs adults or elderly individuals
  • If you use part of your home to store physical inventory or product samples

Deductible expenses include:

  • Refurbishment and repair costs
  • Depreciation
  • A proportion of your rent or mortgage payment
  • A portion of your utility bill
  • Business insurance
  • Office supplies

You can’t deduct landscaping or lawn care costs unless you’re a gardener or you’re in the lawn care business. 

You can also consider using the simplified method for claiming your home office. That allows you to deduct $5 per square foot of your home used for business purposes. Often times, this is a much more convenient way to deduct your home office versus taking the time to itemize each of your expenses.

Important: Before 2017, traditional employees could claim unreimbursed employee business expenses that exceeded 2% of their adjusted gross income on their tax return, including home office expenses. The Tax Cuts and Jobs Act eliminated that option until at least 2026. So, if you’re employed by someone else, you can’t currently write-off any unreimbursed expenses related to your home office.

A Word About Capital Gains

Many people worry about the amount of capital gains tax they’ll pay on a home sale. If you’re planning to sell your primary home and believe you’ll make a profit, you can exclude up to $250,000 of the gain from your income, or $500,000 if you file a joint return with your spouse. There’s a catch: you have to have lived at the home for a minimum period of two years before the sale. 

How Much Does Buying a House Help With Taxes?

Do you get a tax break for buying a house? It depends! Based on your tax situation, you could take advantage of a variety of tax breaks available to homeowners.

Most homeowner credits and deductions only apply if you itemize your return—and you’ll only know whether itemization is worth it after you complete your tax forms. If you’re looking for a simple solution for filing your taxes, go ahead and file your return with TaxAct. As you enter information into your return, TaxAct will recommend whether itemizing your deductions or claiming the standard deduction is the better choice for you. 

Disclosure: All TaxAct offers, products and services are subject to applicable terms and conditions. Price paid is determined at the time of filing and is subject to change.

The TaxAct® name and logo are registered trademarks of TaxAct, Inc. and are used here with TaxAct’s permission.

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