5 Tax Breaks for First Time Homeowners
There’s been a lot of talk lately about how tax write-offs have changed due to the Tax Reform Bill, formerly known as the Tax Cuts and Jobs Act (TCJA). The Tax Reform Bill reduced itemized deductions such as moving expenses and mortgage interest. While those deductions have changed, there are still ways to use your new house to your advantage.
Property Tax Deductions
Property taxes are paid to the state and/or county, and are deductible from federal income taxes. These can include real estate taxes as well. Before the TCJA was passed, you could deduct an unlimited amount for these taxes, as long as you could document that the deduction matched the actual amount of the taxes you paid. For tax years 2018 through 2025, the new cap is a maximum deduction of ten thousand dollars.
Each state offers a specific incentive for buying a new house. These are most often in the form of programs for first-time home buyers and will most likely help you subsidize the down payment on your mortgage. In addition to statewide offers, some states also have targeted funds or special programs aimed at certain geographic or metropolitan areas in the state, so be sure to visit your state’s housing agency website to see if there is additional help available to you. The links below are for some state-specific options:
- Oregon: Oregon Housing and Community Services, HUD
- Washington: HUD
- Idaho: HUD
- Arizona: HUD
- Colorado: HUD
- New Mexico: HUD
- California: HUD
Tax Credit for Mortgage Credit Certificate Holders
This credit is to help people in lower income brackets buy a home. Since it’s a tax credit, it’s beneficial because it lowers the overall amount of taxes you owe. In order to qualify for this tax credit, you need to have a state-issued Mortgage Credit Certificate. The amount varies based on financial need and the price of the home. You can claim this mortgage interest credit even if you take the standard deduction, whereas a home mortgage interest deduction can only be taken if you itemize your deductions instead of taking the standard deduction.
Tax Credit for Home Improvements
There are certain improvements you can make to your new home that qualify for the Residential Renewable Energy Tax Credit. If you install solar panels or other sources of solar energy, you could qualify for this credit on your tax return.
Penalty-Free IRA Payouts
If you have an IRA or other pre-tax retirement savings accounts, you could withdraw money from those accounts to help you pay for your first house. Typically there are fees for early withdrawals (before the age of 60), but if you are buying your first house, you can deduct up to $10,000 from your traditional IRA without penalty. If you’re married and your spouse also has a traditional IRA, they can also withdraw $10,000 for the same home purchase. Additionally, if you have a Roth IRA, you could withdraw contributions you’ve made without penalties, regardless of your age. If you’ve had your account for at least five years, the withdrawal would also be tax-free. Finally, if you are withdrawing from your retirement accounts in order to purchase a home, you should consider the amount of time it will take to recoup those funds, so that you do not negatively impact your future retirement income.
All potential tax benefits should be verified with a professional licensed tax advisor.
If you have questions about these or other tax benefits for first time homebuyers, contact your tax advisor.
If you’d like a referral for a tax advisor, or have questions about anything related to the home-buying process, fill out the form below, or contact us!