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Know What Is Tax Deductible When You Buy A House

Know What Is Tax Deductible When You Buy A House

Buying a house has its perks but most people are not informed on what is tax deductible when you buy a house. The most perk people are familiar with is the stability and security of owning your own home. Another less know perk, although highly beneficial, are the tax deductions when buying a house

Tax deductions are available to home buyers, which can lower your overall tax expenses. To help you with your tax preparation, written below are some tax deductions you should know about.

Tax-free profit on sale

Under the law, you are allowed to keep a sufficient amount of profit from tax under certain conditions:

  • 1
    ​The seller must be single
  • 2
    ​The seller must have owned and lived in the property for sale at least for two years within the five years before the sale
  • 3
    ​The tax-free profit is only up to $250,000
  • 4
    If the seller is married, the tax-free profit is up to $500,000 if at least one spouse owned the house and treated it as his or her primary home at least for two years within the five years before the sale and both spouses should have lived in the same property for the same period
  • 5
    If the seller incurred a loss in the sale, then he or she cannot deduct the loss.

Mortgage interest

The biggest tax deductible one can get is from mortgage interest. In fact, you can deduct the interest up to $1 million of debt for acquiring a home. 

For you to deduct the interest, you need to deduct on Schedule A the amount listed under mortgage interest found in the Form 1098. This form will be given to you by your lender. 

Make sure that the amount stated in the Form 1098 includes all the interest you paid.


Before buying a house, one has to pay an amount known as “points” in order to get a mortgage. Points are charges, which is usually a percentage of the total loan amount. These points are deductible if the following conditions concur:

  • 1
    ​The loan is secured by a real property such as your house
  • 2
    ​The number of points being paid is typical in your area
  • 3
    ​The points will be deducted as interest if cash is paid at closing in order to cover the points.
  • 4
    Lastly, the amount to be deducted should be indicated in the Form 1098.

Real estate taxes

The amount of real estate taxes that can be deducted is shown either in a form you will receive from your lender, if you have an escrow account to pay your taxes, or in your checkbook registry, if you pay taxes directly. 

You can also include the real estate taxes you reimbursed the seller for the amount they paid covering the time you owned the house. The reimbursed amount is shown on your settlement sheet. 

Note that you are not allowed to deduct payments into your escrow account since this is considered money for future tax payments. The only real estate tax payments allowed to be deducted are those actually made during the year from the escrow account managed by your lender.

Make sure you are familiar with and up to date with all REALTOR and closing costs on any real estate transactions. 

​Mortgage Insurance premiums

Private mortgage insurance is used to protect the lender in the event the borrower fails to repay the loan. Under the law, for mortgages made after 2006, premiums paid for private mortgage insurance in 2011 can be deducted. 

The deduction phases out as the income of the taxpayer increases above $50,000 on married filing separate returns and higher than $100,000 on all other returns. However, this deduction expired at the end of 2011.

​Home equity loans

Generally, you are allowed to deduct interest up to $100,000 of home equity debt. This amount will be deducted as a mortgage interest. This amount is deductible no matter how or where you used the money.

​Home improvements

Good news for all taxpayers: all improvements done to your home are deductible. Save the receipts and records of these improvements in order to deduct them fully. 

Note that you cannot deduct the home improvement expenses right away. These can be added to the total cost of your home in order to ultimately determine the purchase price of your home. It is important to keep track of expenses to limit your tax bill in the future.

​Penalty-free IRA payouts for first-time buyers

One can withdraw a total of $10,000 from IRA penalty-fee in order to buy or build a first home for the taxpayer, his or her spouse, their kids, their grand kids or even the taxpayer’s parents. The $10,000 is a lifetime cap though and not an annual one. 

The money withdrawn, however, should be used within 120 days after it is withdrawn. One need not be a first-time home buyer in order to qualify as long as he or she has not owned a home for two years. However, the money will still be taxed in your top bracket aside from those attributable to non-deductible contributions. 

When you couple first time home buyer programs along with this tax break, it makes it a more desirable decision to buy over renting. 

​Energy credits

As mentioned above, all improvements can be deductible. But there is a special item under the deductibles dedicated for energy tax credit up to $500. 

Tax credits are considered more valuable than a tax deduction since the former lowers your tax bill per dollar. The credit can be up to 10% of the money spent on energy saving equipment and improvements for your home. 

In addition to the 10% tax credit, there is a completely separate credit of 30% of the cost of more expensive and elaborate energy saving equipment.

​Adjusting your withholding

If buying a new home will make you mortgage interest deduction higher or make you an itemizer for the first time, then you do not have to wait until the filing of your tax return to realize the savings. 

Please make sure that you conduct your own research and verification of the topics discussed above. I am no expert in tax law and I do not claim to be. 

I am an expert at servicing your needs as your Austin REALTOR & the surrounding areas. During any transaction I always recommending a certified tax professional or going online to the IRS directly online @ to have your specific questions answered.


Alfonso Rodriguez

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