Buying a home can help lower your tax bill. In fact, tax breaks for homeownership are a primary motivation for many people to buy their own home.
To make sure you get the maximum benefit from your home purchase, however, it’s important to understand the potential tax benefits.
Keep these tax considerations in mind when you’re purchasing a home.
You can deduct the interest and property tax portions of your mortgage payment
Your house payment includes both interest and principal payments.
You may pay insurance and property tax payments to your mortgage holder, who in turn pays them when due. You may also pay other charges, most notably mortgage insurance premiums if required.
You can generally take a deduction for the interest you pay to your bank or other lender. You can also deduct the property tax your lender pays on your behalf.
Private mortgage insurance premiums are no longer deductible
Don’t count on deducting private mortgage insurance premiums.
If you’re buying a house now, you probably won’t be able to deduct them. Private mortgage insurance, or PMI, is coverage your lender may require you to buy if you have too little equity in your home, to protect the lender against your default.
The deduction for PMI originated in 2007, but expired at the end of 2014. Unless Congress renews this deduction, the 2014 tax year is the last it can be claimed.
Before you count on how much you’ll save in taxes by purchasing a house, consider how many other itemized deductions you take, and whether you itemize your deductions. Even if you can itemize deductions after you buy a house, you may not save as much on your tax bill as you think. That’s because your total itemized deductions only reduce your taxes to the extent that they are greater than your standard deduction.
On the other hand, if you already itemized your deductions, or if you are close to being able to itemize your deductions already, you’ll receive the maximum benefit from your interest and property tax deductions. Common itemized deductions include charitable contributions and state income tax.