8 Tax Implications that Come with a Mortgage

Buying a home changes a lot. You get more freedom, more space and, in certain instances, a little more money to spend on the things you love—like gardening, home improvement or adding to your music collection. That's because, when you buy a home, own a home, renovate a home or sell a home, you're entitled to certain tax benefits.

Good news, right?

Whether it's your first home or not, understanding how buying a house—and how different home loan products affect your taxes—will allow you to report your income accurately and ultimately help you save money. Here's what you need to know.

What are the tax benefits of homeownership?

The tax benefits of buying a home are plentiful—but you need to understand them in order to make a profitable move. Let's review the different deductions and benefits:

1. Mortgage interest tax deduction—If you take out a new mortgage this year, you may be able to deduct it on your federal income tax return. There are a few limitations, however. For example, the mortgage must be under $1 million and it must have been used to secure your principal residence or another qualified home. That means if you own multiple properties, you likely won't be able to claim this tax deduction on all of them.

    

   The mortgage tax can be complicated and there are a lot of specific requirements, so speak to a tax professional or another expert if you have questions.

    

2. Mortgage interest credit—First-time homebuyers or people who make below a certain annual income generally qualify for a mortgage interest credit or a dollar-for-dollar reduction in the amount of tax they owe. The IRS says you must have a mortgage credit certificate to be eligible for this credit. If you have any questions about this, speak to your state government to obtain one.

    

   If you itemize your deductions, you can also claim your mortgage interest on your federal income tax return, ultimately making your home more affordable. Not all interest paid is deductible, but as long as your mortgage doesn't exceed $750,000, the interest you pay will likely qualify as a deduction.

    

3. Mortgage points—You've likely learned that it costs money to obtain a mortgage. Some of these costs include lender fees, property appraisal fees, contract drafting fees and more. Luckily, most of these can also be deducted from your federal tax return. Some closing costs may qualify as well.

    

   Depending on your situation, you may be able to deduct the lump sum of your mortgage points for the tax year you obtained the mortgage. You may, however, need to deduct some of the points each year over the life of the loan.

    

   Speak to a tax professional to find out the best way to deduct these points from your federal tax return.

    

4. Mortgage insurance—Another mortgage benefit is mortgage insurance. One of the most common questions lenders and tax professionals hear is, “Is mortgage insurance tax deductible?”

    

   Technically, yes—but maybe not for long.

    

   The tax break that enables homeowners to deduct private mortgage insurance and related premiums expired in 2017. But in 2019, Congress extended the tax provision through 2020. Unless it's extended again, this will likely be the final year to claim mortgage insurance on your taxes.

    

5. Home equity debt—You can, however, still claim interest paid on home equity debt as long as the money is used “to buy, build or substantially improve the taxpayer’s home that secures the loan.” That equity, though, cannot exceed the cost of the home.

    

   And if you take out home equity debt to pay off loans, credit card debt or buy a second home, you cannot claim it on your taxes.

    

6. Home improvements—Home improvements that make the home more valuable can also be claimed. This can be tricky, though, because repairs that merely maintain the integrity of the home generally cannot be deducted on your federal tax return.

    

   Some qualifying improvements include:

    

   • Putting an addition on your home.

   • Replacing an entire roof.

   • Paving your driveway.

   • Installing central air conditioning.

   • Rewiring your home.

   • Putting a recreation room in your unfinished basement.

   • Putting up a fence.

   • Putting in new plumbing or wiring.

    

   Costs associated with these improvements, like surveying and labor, can typically be included in your deduction.

    

7. Home office expenses—If you're self-employed or work remotely from your home, you can also deduct portions of certain expenses. To reduce you and your accountant's workload, the IRS now allows qualified taxpayers to multiply a prescribed rate by the allowable square footage of the office in lieu of determining actual expenses.

    

   If you choose to use the previous method to determine your deductions, you'll need to track the actual expenses of your home office. These expenses may include mortgage interest, insurance, utilities, repairs and depreciation.

    

   Regardless, you must be able to prove that you use your home as your principal place of business and that you regularly use part of your home exclusively for conducting business.

    

8. State and local property tax deduction—Buying a home won't just help you save on federal taxes, it could also help you file your state taxes. As long as you pay your property taxes and itemize your deductions, you're allowed to deduct up to $10,000—or $5,000 if married filing separately—for state and local income, sales and property taxes.

    

   There are a number of other state and local tax breaks you can get from a mortgage that vary based on where you live. This is where consulting a professional can help.

The mortgage team at Mountain America Credit Union will answer your questions, assess your financial situation and recommend the best mortgage program for your situation. Schedule a meeting for your free, no-obligation consultation with a Mountain America mortgage loan officer today.