There are many financial benefits that come with owning a home. As you continue making your monthly mortgage payments, you will be able to build equity, and as your house increases in value, your equity will grow even further.
Of course, building equity is just one of the financial incentives to become a homeowner. You’ll also be able to qualify for a considerable amount of tax benefits, which can potentially decrease your federal tax obligations by thousands of dollars every year.
Whether you are a first-time homebuyer or have already owned a home, you’ll want to be sure to take advantage of as many household tax benefits as you possibly can. In this guide, we will discuss the most important things you need to know about filing taxes as a homeowner.
Tax Benefits Available to All Homeowners
Though first-time homebuyers will often be eligible for more tax benefits than people who have owned a home in previous tax years, there are still plenty of federal tax benefits that are available to all homeowners.
Through the Home Mortgage Interest Deduction, homeowners can deduct the total interest payments they have made on their mortgage. When you make your monthly mortgage payment, a portion of the payment is interest (the cost of borrowing) and a portion is principal (what you gain in equity).
As a part of the Tax Cuts and Jobs Act (TCJA), U.S. homeowners can deduct interest payments for up to $750,000 of the mortgage value. But keep in mind that the standard deduction for the tax year 2021 is $12,550 for individuals and $25,100 for married people filing jointly—you won’t be able to take advantage of this deduction until you’ve reached that limit. Just in case you’re planning ahead, the standard deduction for the tax year 2022 is $12,950 for individuals and $25,900 for married people filing together.
If you are a homeowner, you almost certainly need to pay property tax every year. In the U.S., the average effective property tax rate is about 1 percent of a home’s value (meaning if your home is worth $350,000, your payment might be about $3,500), but this can vary a lot depending on where you live. As of 2022, homeowners can deduct up to $10,000 of property taxes from their federal tax obligations.
In addition to these two big deductions—mortgage interest and property taxes—the IRS offers additional tax benefits to qualified homeowners. For example, the Residential Energy Credit is available to those who install a geothermal heating system, solar panels, or wind turbines to heat or cool their home. Certain energy-efficient window installations can also qualify for a tax credit—something that reduces your total tax obligations even more than an equivalent tax deductible would.
Tax and Federal Benefits Available to First-Time Homeowners
If it is your first time buying a home, you should first look at the Department of Housing and Urban Development (HUD). Currently, through a partnership with many different tax-exempt organizations, first-time homebuyers can potentially access funds that are not available to the general public. This program aims to help make it easier for people to enter into homeownership and potentially decrease their initial down payment.
Additionally, first-time homebuyers will also have the option to make a large withdrawal from their Individual Retirement Account (IRA)—up to $10,000 for individuals and $20,000 for married filers. Typically, you will need to pay a 10 percent penalty for withdrawing from your IRA before you reach retirement age, but the IRS makes exceptions for people who are buying a home for the first time (this is one of the few instances you can withdraw without needing to pay the penalty). However, even though you are exempt from the penalty, you should remember that you will need to pay income taxes on any withdrawal you make.
You might also want to consider getting assistance from the Federal National Mortgage Association (FNMA)—also known as Fannie Mae. By completing course design to help teach you about the home buying process, Fannie Mae will pay up to 3 percent of the closing costs for qualified homebuyers. On average, this can help save you about $500.
Keep in mind that these programs are among the many offered at the federal level. But there might be tax breaks, credits, and other benefits available at the local, county, or municipal level as well. If you are currently in the process of buying a home, be sure to ask your realtor which other benefits might be available in your specific area.
Who is Considered a First-Time Homeowner?
The exact definition of “first-time homebuyer” varies across the federal government. According to the HUD, a first-time homebuyer is someone who has not owned a property within the last three years (with some exceptions). However, in the eyes of the IRS, a first-time buyer is someone who has not owned a home within the last two years. In both instances, this means you could potentially qualify for “first-time” status even if you’ve owned in the past.
Other Federal Government Programs
The Federal Government has several other programs designed to help make it easier to buy a home—these programs help make it possible to secure a mortgage with little to no down payment. Section 184 loans are available for low-income households and typically require a down payment as low as 2.25 percent. These loans are also available to all Native Americans, regardless of income.
Additionally, the Veterans Association (VA), the Federal Housing Administration (FHA), and the Department of Agriculture (USDA) have mortgage assistance programs available to qualified homebuyers. These loans are available to both first-time and previous homebuyers, so long as you can meet a few specific qualifications.
Buying a home for the first time doesn’t have to be difficult—there are a lot of programs and tax benefits available, helping to make it much easier to become a homeowner. If you are thinking about buying or have bought a home within the last year, be sure you take advantage of every available program.
