How Does Buying A Home Affect My Tax Return?

The tax benefits of buying a home are typically part of the reason new homeowners decide to purchase their dream homes. The process of buying a home doesn’t have to be challenging to navigate, but there can be a lot to learn. 

In 2017, the Tax Cuts and Jobs Act made adjustments to some of the benefits that are available to homeowners. The standard deduction increased, and new limitations were introduced on itemized deductions, so it’s less likely that homeowners know if they’ll utilize all the benefits. 

The 2019 deduction amounts are:

  • Single or married filing separately: $12,200
  • Married filing jointly: $12,400
  • Head of household: $18,350

Potential Deductions

The potential deductions a homeowner can claim are Mortgage interest deduction, Tax-free profits on qualified home sales up to $500,000, IRA withdrawals, and Local and State deductions.

Mortgage Interest Deduction

If you itemize on your return, you can deduct the interest on the first $750,000 of your home, or $375,000 if you’re married but filing separately. Pre-2017, that amount was $1,000,000 or $500,000 if you’re married but filing separately. If you purchased your home before December 16th, 2017, you are still eligible to use the higher amounts. 

The Mortgage Interest deduction is not available to every taxpayer, as your Schedule A must be itemized versus taking the standard deduction. 

If you have a line of credit against your home equity, that amount is now included in the $750,000 deductible. In contrast, before, you would be allowed up to $1,000,000 plus $100,000 line of credit. 

Tax-Free Profits on Qualified Home Sales 

Homeowners who have had their homes for two out of the five previous years can profit on the sale of their home, tax-free. Single homeowners can collect up to $250,000 and $500,000 for married couples.

IRA Withdrawals

If you’re a first time home buyer, you can withdraw up to $10,000 from an IRA to put towards the down payment of your home, tax-free. You may need to have had the account for five years or more to qualify, but ask your bank for the details on your specific account. 

Local and State Deductions

Depending on where you live and the value of your home, you may be able to deduct by utilizing tax deductions offered by the State or your local government. You can deduct up to $10,000, or $5,000 if married but filing separately. Most people won’t qualify, due to the higher deduction standard, but it’s worth looking into in case you do. 

What You Can’t Deduct

The following fees would be included in the basis of your home, as they were done upon or before closing and they are not deductible:

  • Abstract fees
  • Appraisals
  • Recording fees
  • Surveys
  • Title insurance

The following are not deductible:

  • Property insurance
  • Depreciation
  • Utility payments

Experts suggest that you shouldn’t buy a home-based solely on the tax benefits. If you buy a home you can’t really afford because of significant deductions, then it’s not a great investment for you going forward. Be sure to ask these questions during the home buying process, and you’ll be all set. 


Author Bio:

Kurtis Forster is a real estate agent for Team Forster in London, Ontario. He brings a wealth of knowledge and expertise about buying and selling real estate.

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