Tax Credits Available to Home Buyers, Homeowners, and Home Sellers
Getting ready to file your taxes and want to know more about the different tax breaks that are available? Learn more about how you can save money on your taxes—whether you’re a home buyer, home seller, or simply a current home owner.
Mortgage interest on loans up to $1 million is completely deductible for the year in which you pay it to buy, build, or improve your principal residence or second home.
If you are a buyer and you or the seller pays points, they are deductible for the year in which they are paid.
Property taxes and interest are deductible every year.
Other home-buying costs and closing costs are NOT immediately tax-deductible, but they can be figured into the adjusted cost basis of your home when you sell, as can any significant improvements.
Are there tax credits for first-time homebuyers?
Many city and county governments offer Mortgage Credit Certificate programs, which allow first-time home buyers to take advantage of a special federal income tax write-off, which makes qualifying for a mortgage loan easier. Requirements vary from program to program. Here are some general requirements to keep in mind:
Some credit may be claimed only on your owner-occupied principal residence. There are maximum income limits, which vary by locality and family size.
You must be a first-time homebuyer, which means you must not have had any kind of ownership interest in a principal residence during the past three years. This restriction may be waived, however, if you are buying property within certain target areas.
Allocations must be available. A local MCC program may have to decline new applications when it runs out of funds.
What is the Mortgage Credit Certificate program?
The Mortgage Credit Certificate program allows first-time home buyers to take advantage of a special federal income tax credit. This program allows buyers credit in qualifying for the tax advantage they'll receive after they purchase the home. The amount of the credit is tied to a local formula that every city with an MCC program must follow. A MCC credit, which can total $2,000 or more, reduces the borrower's federal tax liability by an amount tied to how much one pays in annual mortgage interest. Both the borrower's income and the purchase price of the home must fall within established guidelines.
What are the rules for Mortgage Certificates?
To qualify for a mortgage credit certificate, both your income and the purchase price of the home must fall within established city guidelines. These guidelines vary by city but generally only permit people who earn an average income or slightly higher than average income. A limited number of cities have authorized the MCC program. Contact your Realtor for more information.
Mortgage interest on loans up to $1 million is completely deductible for the year in which you pay it to buy, build, or improve your principal residence or second home. You also can deduct any points you pay when you refinance your home, but you must do so ratably over the life of the loan. Property taxes and interest are deductible every year.
Are taxes on second homes deductible?
Mortgage interest and property taxes are deductible on a second home if you itemize. Check with your accountant or tax adviser for specifics.
How do home mortgage deductions work?
The mortgage interest deduction entitles you to completely deduct the interest on your home loan for the year in which you paid it. Mortgage interest is not a dollar-for-dollar tax cut; it reduces taxable income. You must itemize deductions in order to do this, which means your total deductions must exceed the IRS's standard deduction. Another point to remember is that the amount of interest on your loan goes down each year you pay on your mortgage (all standard home-loan formulas pay off interest first before significantly paying into principal). That's why paying extra on your principal every year can help you pay off your loan early.
How are fees and assessments figured into a homeowners association?
Homeowners association fees are considered personal living expenses and are not tax-deductible.
However, if an association has a special assessment to make one or more capital improvements, condo owners may be able to add the expense to their cost basis to reduce their capital gains as a seller.
When you sell your home, the cost basis of your home (in other words, the money you’ve spent for permanent improvements throughout the ownership of your home) can be used to reduce the capital gains taxes when the property is sold.
Your original home-buying costs, including closing costs, while not immediately tax-deductible, can be figured into the adjusted cost basis of your home when you go to sell. These fees would include title insurance, loan-application fee, credit report, appraisal fee, service fee, settlement or closing fees, bank attorney's fee, attorney's fee, document preparation fee, and recording fees.
If you live in a condo association or neighborhood that has made one or more capital improvements, you may also be able to add this expense to your cost basis. For example, if the association puts a new roof on a building, the expense could be considered part of a condo owner's cost basis only if they lived directly underneath it. Overall improvements to common areas, such as the installation of a swimming pool, need to be considered on a case-by-case basis but most can be included in the cost basis of any owner who can show their home directly benefits from the work.
Where Can I Find More Information?
The Internal Revenue Service publishes a number of real estate publications. They are listed by number:
521 "Moving Expenses"
523 "Selling Your Home"
530 "Tax Information for First-Time Homeowners"
541 "Tax Information on Partnerships"
551 "Basis of Assets"
555 "Federal Tax Information on Community Property"
561 "Determining the Value of Donated Property"
590 "Individual Retirement Arrangements"
908 "Bankruptcy and Other Dept Cancellation"
936 "Home Mortgage Interest Deduction"
Learn More About Central Ohio Home Ownership & Taxes
Another great way to get more information? Just contact our office! As highly-experienced real estate professionals, we know a lot about home buying, home ownership, and home selling. That includes which cities and towns of Central Ohio will qualify for the Mortgage Certificate Program, tax breaks and deductions available to buyers, sellers, and owners, and of course, all the specifics on buying or selling a home in one of Central Ohio’s beautiful communities.