Congratulations on buying your first home! Trading rent receipts for a mortgage is a huge milestone, and while closing on a property involves a mountain of paperwork, it also opens the door to some valuable tax advantages. Many new homeowners are caught off guard by how their tax picture shifts after buying property. Here are some key areas to keep on your radar:
- Itemizing – When you rent, you almost always take the standard deduction. As a homeowner, you’ll want to look closely at itemizing your deductions instead. If the total of your mortgage interest, property taxes, and other deductible expenses adds up to more than the standard deduction, itemizing will save you money. We can help you run the numbers to see which method gives you the biggest tax break.
- Deducting Mortgage Interest
For many buyers, the biggest tax perk is the mortgage interest deduction, which allows you to deduct the interest paid on your home debt. Just keep in mind that you are only allowed to deduct equity loans if they are used for the purchase of a first or second home and home improvements. Also, the interest deduction is limited to interest on a total of $750,000 of combined home mortgage debt. - Deducting Property Taxes – These types of taxes are deductible up to $40,000 as an itemized deduction, but are subject to income limitations.
- The “Must-Do” Tracking: Closing Costs and Improvements – This is the step most buyers miss. Keep your closing disclosure statement (the ALTA or HUD-1 form) from your home closing and provide a copy to your CPA or other tax preparer. While things like homeowners insurance and appraisal fees aren’t deductible, items like “points” paid to lower your interest rate are deductible.
- Also, start a file to track any major capital improvements you make—like a new roof or a central air system. These won’t help on this year’s taxes, but they increase your home’s “basis,” which can positively impact your tax bill when you eventually sell down the road.
- What if I work from home in my new house?
If you are self-employed or run a business from your new home, you may qualify for the home office deduction. This allows you to deduct a portion of your mortgage, interest, property taxes or rent, utilities, repairs, insurance, and depreciation based on the square footage of your dedicated workspace compared to the total square footage of your home. Unfortunately, this deduction is only available for self-employed individuals and is currently not available for regular W-2 employees who work from home.
Ready to make the right moves? Whether you just settled on your property or are still browsing open houses, David and his team are ready to help you navigate these changes with peace of mind. Contact us today to schedule a check-in.