Tax Implications of Buying a Home

If you recently bought a home or are thinking about buying, you probably have a million questions running through your head. While choosing paint colors can seem like a chore, just wait until you get to taxes!

Do I get a tax break for buying a house? Is mortgage interest tax deductible? How do I maximize my deductions? These are just a few of many good questions around taxes. And while taxes are never fun, the money you can save by answering these questions makes this piece well worth the read.

1. Should I choose the standard deduction or itemize?

Owning a home means that you can now deduct your property taxes and the interest you pay on your mortgage, which together can be a significant tax break for buying a home.

However, many people overestimate the value of these tax deductions, which won’t always add up to more than the standard deduction, especially if you don’t have other things you can itemize, such as charitable contributions or medical expenses. If your itemized deductions don’t add up to more than the amount for your filing status, you should choose the standard deduction.

2. Is my mortgage tax deductible?

You can deduct the interest you pay on your mortgage, points paid to lower the mortgage interest rate, property taxes and some parts of the closing costs. Check out IRS Form 1040 to see the line item deductions. There are several online tools, including mortgage interest deduction calculators, to help you estimate how much you can deduct, but it’s always wise to consult a certified public accountant to be sure you’re taking advantage of every possible deduction.

3. What if I sold my previous home in the same year?

Your tax on the sale will depend on whether you made a profit. You can exclude up to $250,000 in profit from the sale of your primary residence ($500,000 for married couples), which is known as a capital gains tax exclusion. There’s one big caveat: You had to have lived in the home for at least two of the previous five years; it cannot be a rental property. However, there are several exceptions to the rule, so you should review the details with an accountant. If you did not make a profit on the sale of your home, you cannot deduct a loss on your taxes.

4. What if the home I bought was an investment property?

The IRS treats primary residences differently than investment properties. Note that any rent that you receive is treated as taxable income, and investment properties do not qualify for the capital gains tax exclusion. The good news is that if you rent your property, there are a variety of expenses you can write off, including repairs, insurance and maintenance.

5. If I purchased a second home that I don’t rent out, is the mortgage interest tax deductible?

According to IRS.gov, you can claim a mortgage interest tax deduction on a second home if it is not an investment property. If you rent out the residence, you must use it for more than 14 days or more than 10% of the number of days you rent it out, whichever is longer. In addition, real estate taxes paid on your secondary residence are generally deductible.

For additional details, check out Publication 530: Tax Information for Homeowners, published on IRS.gov.