What Tax Breaks are First Time Home Buyers Entitled to?
For many first time homebuyers, purchasing a home can sound like an intimidating undertaking if you have never done it before. The thought of relocating and the level of financial investment gives many people anxiety. Thankfully, the federal government wants to make the process a little bit easier and less intimidating. They are doing this with a range of tax breaks for first time home buyers.
To get the most out of your purchase, do not simply settle for the standard deductions and write-offs. Instead, make sure you take advantage of the many tax breaks available to you. So, what exactly is tax deductible when buying a house for the first time?
Real Estate Taxes
Each year, you can deduct your local property taxes on Form 1040 Schedule A. To find the amount you can deduct, you can check Form 1098. If you pay through an escrow account or check your records if you pay directly to the municipality.
Additionally, for the first year in your home, you should earn an even bigger tax reduction. If during the purchase of your home you reimbursed the seller for their prepaid real estate taxes, you can take those as itemized deductions as well.
IRA Payouts
If increased investment opportunity is one of the reasons for buying a home, then you will appreciate this benefit for your IRA. If you pull from your IRA to cover your down payment and other purchasing costs, first time home buyers do not have to pay a penalty fee of about $10 for early withdrawals.
Mortgage Interest Deductions
Mortgage interest is the second half of your monthly mortgage payment—the rest goes toward the principal balance. Though interest rates are hovering near historic lows, they can still be a financial burden unless you take advantage of the option to deduct mortgage interest on up to $1 million of debt.
Claiming this tax break is easy. Each year, your lender will send you Form 1098 listing the interest you paid during the previous year. Simply enter this number on Form 1040 Schedule A—under itemized deductions—and claim your tax break.
Mortgage Points Deduction
Beyond the typical interest deduction, you are eligible for a possible tax break based on mortgage points—prepaid interest that represents 1 percent of your total mortgage. You are allowed to deduct Discount Points, or the fees paid directly to the lender in exchange for a reduced interest rate. This is also called “buying down the rate.”
Mortgage Credit Certificate Program
A tax credit for buying a house is more valuable than a deduction because it cuts back on your taxes owed, dollar-for-dollar. For low-income home buyers, the Mortgage Credit Certificate program gives back 20% to 30% of the interest you pay every year as money back in your pocket.
You will need to qualify for the Mortgage Credit Certificate program before purchasing your home to claim this credit.