Buying your first home will probably be your largest purchase to date. It’s exciting to finally own your own space, but it can also be nerve-wracking due to the sheer size of the transaction. Most homeowners used to deduct things like their moving expenses and the mortgage interest deduction to ease the thought of their new mortgage payments. The Tax Cuts and Jobs Act (TCJA) reduced itemized deductions like these, but there are still ways to use your new home to your advantage on your tax return.
1. The Mortgage Credit Certificate
This credit is one way for low/moderate-income home buyers to save on taxes. The amount of the credit is equal to 20% of the mortgage interest paid during the tax year.*
To qualify, you must meet certain income requirements set by the IRS and have a state-issued Mortgage Credit Certificate. You’ll need to apply for the MCC before you close on your home, and there is some cost associated with the application. You may want to speak with your lender to understand if the MCC is right for you.
*You can still deduct the remaining 80% of your interest for the mortgage interest deduction (more on this below).
2. State-level incentives
Each state offers a specific incentive for buying a new home. For example, Georgia has the Georgia Dream program, and Texas has the My First Texas Home program. Each of these programs is for first-time home buyers and usually helps you to get a mortgage with a small down payment. Go to your state’s website to learn more about your individual incentives, or to this site to see them all.
3. Local property tax deductions
A property tax deduction is state and local tax that is deductible from federal income taxes. These include real estate taxes as well. Before the TCJA was passed, you could deduct an unlimited amount for these taxes. The new cap after tax reform is $10,000 for tax years 2018-2025.
4. Penalty-free IRA payouts
If you have an IRA or other pre-tax retirement savings account, you might be able to withdraw some of that money to help pay for your first home. Because these accounts are meant to be used when you reach the age of 59.5, there are usually fees associated with early withdrawals. But if you are buying your first home, you can deduct $10,000 from your traditional IRA without a penalty. Your spouse can also withdraw $10,000 from their account for the same purchase. If you have a Roth IRA, you can withdraw contributions you have made penalty-free at any time. If your account is at least five years old, then your withdrawal will also be tax-free. This should be a last resort because it will take time to build your savings back up.
5. Home improvements
Certain home improvements you make to your new home can qualify for the Residential Renewable Energy Tax Credit. If you install any solar panels or other solar energy sources, you will qualify for this credit to use on your tax return. Learn more about this credit here.
6. Capital gains
When you go to sell your first home, you might be able to exclude any capital gains on your tax return. You can qualify for up to $250,000 if single and $500,000 if married filing jointly. To qualify you must consider the home your primary residence for 2 out of the 5 years leading up to the sale. You also must not have sold or claimed capitals gains on another home sale within two years of this one.
For more information about tax breaks for renters and homeowners, check out our infographic below.
This article is up to date and accounts for tax law changes for tax year 2018 (tax returns filed in 2019). Learn more about tax reform enacted under the Tax Cuts and Jobs Act here.