Is Your New Home Purchase Tax-Deductible?

Buying a new home is a major milestone in life. The moment those keys hit your hand, you can't help but feel pride and excitement for all that lies ahead. 

But as you start to settle into your new home, reality starts to set in. You're responsible for upkeep, repairs, and most importantly – the rising costs of mortgage payments.

Many homeowners wonder if their new home purchase is tax-deductible. While the answer isn't clear-cut, there are certain situations in which the purchase can be used as a deduction on your taxes.

Understandably, the topic of taxes can be confusing. And when it comes to deciphering which expenses are deductible and which ones aren't, it's easy to see why some people might feel overwhelmed. But, don't worry! We're going to break it down for you.

In this article, we will cover some of the most common questions that new homeowners have about tax deductions, including:

• Can I deduct my new home purchase from my taxes?

• What goes into the calculation for a deduction?

• Are there any other factors I need to keep in mind when claiming my deduction come tax season?

• What are some common deduction mistakes that homeowners make?

Keep reading to get all the answers to your questions from the team at Llano Real Estate Group. As with any tax-related issues, always consult a tax professional to get the most accurate advice for your specific situation.

Commonly Asked Questions About New Homes and Taxes

Question: Can I deduct my new home purchase from my taxes?

The answer to this question isn't as simple as a yes or no. While you can't deduct the entire purchase price of your home on your taxes, there are certain situations in which a portion of the purchase can be deducted. To start, let's cover the basics of how deductions work. A deduction is an expense that can be subtracted from your taxable income. This lowers the amount of income subject to taxes, which reduces your tax liability.

There are two main types of deductions that you can claim on your taxes: standard deductions and itemized deductions.

Standard deductions are a set amount that you can deduct from your taxable income, regardless of your specific expenses. For the 2021 tax year, the standard deduction is $12,550. This means that if your taxable income is $50,000, your tax liability will be calculated as if your income was $37,450.

On the other hand, itemized deductions are deductions that you can claim for specific expenses that you've incurred during the year. Common itemized deductions include things like mortgage interest, property taxes, and charitable donations. In order to claim itemized deductions, you must first determine if your deductions exceed the standard deduction amount. If they do, then you can itemize your deductions on your tax return.

For example, let's say that your taxable income is $50,000 and you paid $5,000 in mortgage interest during the year. In this case, you would itemize your deductions because your total deductions ($5,000) exceed the standard deduction amount ($12,550).

Now that we've covered how deductions work, let's get back to the questions that homeowners have about whether or not their new home purchase is tax-deductible.

Questions: Is there any tax assistance available?

There are certain situations where you can deduct a portion of the purchase. We'll cover those situations next.

Generally, you can't deduct most of your new purchase costs within the first year of owning your home. This means that you can't deduct things like your down payment, closing costs, or real estate agent fees. The only exception to this rule is if you're a first-time homebuyer. If you're a first-time homebuyer, you may be able to take advantage of a tax credit that allows you to deduct a portion of your purchase costs.

The tax credit is called the Mortgage Credit Certificate (MCC) program, and it's available through participating lenders. To be eligible for the program, you must meet certain income requirements and use your home as your primary residence. If you're eligible for the MCC program, you can claim a tax credit on your taxes equal to 20% of your mortgage interest. This can significantly reduce your tax liability and help you save money come tax season.

Question: What costs are associated with the new home purchase that I can deduct from my taxes?

There are a few different costs associated with your new home purchase that you may be able to deduct from your taxes. These include:

• Mortgage interest

• Property taxes

• Certain energy-efficient home improvements

Mortgage interest is one of the most common deductions that homeowners take advantage of. If you're taking out a mortgage to finance your home purchase, the interest that you pay on your loan is tax-deductible. In the following tax seasons, you will want to itemize your deductions on your tax return in order to deduct your mortgage interest. The total amount of interest you paid during the year will likely exceed the standard deduction amount.

To calculate how much mortgage interest you can deduct, simply take the interest rate on your loan and multiply it by the number of months that you paid interest. For example, if you have a 4% interest rate and you paid interest for 12 months, your deduction would be $1,200 ($100 per month x 12 months).

Property taxes are another cost associated with owning a home that you may be able to deduct from your taxes. Property taxes are typically paid through your mortgage lender as part of your monthly mortgage payment. The amount of property taxes you can deduct depends on the state and local tax rates. However, you can typically deduct up to $10,000 worth of property taxes on your federal tax return.

Certain energy-efficient home improvements can also be deducted from your taxes. The Energy Star program offers a tax credit for certain energy-efficient home improvements, such as windows, doors, and insulation. The tax credit may vary depending on specific scenarios, so speak with your tax advisor to see if you're eligible.

Question: Can I deduct my new home purchase on my taxes if I'm selling my old home?

The answer to this question depends on a few factors. If you're selling your old home and using the proceeds from the sale to help finance your new home purchase, you may be able to deduct a portion of the interest that you pay on your new mortgage. This deduction is available for both first-time homebuyers and those who have owned a home in the past.

In order to deduct the interest on your new mortgage, you must itemize your deductions on your tax return. This means that your total deductions must exceed the standard deduction amount ($12,550 for the 2021 tax year).

Furthermore, the interest deduction is only available for the portion of your mortgage that is used to finance your new home purchase. This means that if you're using the proceeds from your old home sale to pay off debt or finance other expenses, you won't be able to deduct the interest on those debts.

For example, let's say that you're selling your old home for $200,000 and using the proceeds to finance your new home purchase and pay off debt. In this case, you can only deduct the interest on the portion of your new mortgage that is used to finance your new home purchase.

The interest deduction is a great way to reduce your tax liability and save money come tax season. However, it's important to keep in mind that you can only deduct the interest on your new mortgage if you itemize your deductions. If you don't itemize your deductions, you won't be able to take advantage of the deduction and pay more in taxes.

Lastly, let's cover a few common mistakes that homebuyers make when deducting their new home purchase on their taxes.

Common Mistakes that Homebuyers Make with Home-Related Taxes

1. Not itemizing their deductions.

If you don't itemize your deductions, you won't be able to take advantage of the interest deduction on your new mortgage. This is one of the most common mistakes that homebuyers make when deducting their new home purchase on their taxes.

2. Not keeping track of their expenses.

Another common mistake that homebuyers make is not keeping track of their expenses. This can be a costly mistake, as it can prevent you from deducting certain expenses come tax season.

3. Failing to file the correct paperwork.

The last common mistake that homebuyers make is failing to file the correct paperwork. This can result in delays or even denial of your deduction. To avoid these mistakes, be sure to itemize your deductions, keep track of your expenses, and file the correct paperwork. Doing so will help you maximize your deduction and save you money come tax season.

Find Your Next Home with Llano Real Estate Group

Saving money at tax time is critical for families looking to buy a new home. The good news is, with a little bit of planning, you can maximize your deductions and save yourself some money come tax season.

If you're in the market for a new home, be sure to contact Llano Real Estate Group. We specialize in helping families find their perfect home, and we'll work with you to ensure that you're getting the most for your money.

Contact our team today to learn more about available properties and how you can save big with the right home-buying team!