Overhead view of couple in living room looking at renovation blueprints

5 tax benefits of buying a home

The tax benefits of buying a home are one of the many advantages of homeownership vs. renting. Tax breaks for first-time homebuyers are either deductions or credits. Both can save you money, but what’s the difference? Tax deductions are expenses subtracted from your income before you figure out the amount of tax you owe. Tax credits are subtracted from the amount of tax you owe. This guide breaks down what is tax-deductible when you own a home.

  1. Mortgage interest deduction

    For homeowners who itemize, the mortgage interest deduction can be a significant tax perk. That’s because it can reduce your taxable income by deducting the interest paid on a home mortgage. The Tax Policy Center estimates that 14 million homeowners took advantage of this tax break in 2018.1

  2. Mortgage points tax deduction

    “Points” are essentially one-time, pre-paid interest charges on your loan. The more points you pay, the lower the interest rate on the loan, which can reduce your monthly mortgage payments. Borrowers can typically pay anywhere from 0 to 3 or 4 points, depending on how much they want to buy down their rates. Discount points may be tax-deductible as home mortgage interest if you itemize your deductions. In addition, according to the Tax Information for Homeowners published by the IRS, “The buyer may deduct points paid by the seller, provided the buyer subtracts the amount from the basis or cost of the residence.”2 Cost basis is the original value or purchase price of the property.

  3. Property tax deduction

    A property tax is a tax assessed on real estate by your local government, usually based on the value of the property you own. Property tax revenue pays for roads, schools, libraries, snow removal and other municipal services. After you close your loan, you may be eligible for a property tax exemption or discount depending on where you live. For example, Colorado offers property tax exemptions to the disabled. In Alaska, some homeowners 65 years of age or older qualify for a dollar amount exemption. A disabled veteran in Arkansas may receive a full property tax exemption. Once you’ve learned more about the laws in your state, contact your county and file for an exemption or discount as soon as possible.

  4. Residential renewable energy tax credits

    This federal tax credit may be an incentive to homeowners looking to make improvements designed to boost energy efficiency. Geothermal, wind, solar and fuel cell energy systems may be eligible. Read more on the tax credit amount, requirements and qualifications.

  5. Home improvement tax deduction

    Certain home renovations increase the value of your home, and some improvements can even lower your tax bill when you sell. The IRS lets you add capital improvement expenses to the original value or purchase price of your property, reducing the size of the capital gain when selling.3 The National Association of Realtors notes that this tax benefit doesn’t come into play for everyone, “but if you plan to live in your house for a long time or make lots of upgrades, saving receipts could be a smart move.”4 Some examples of eligible improvements include a new roof, heating and air conditioning systems, attic insulation and a kitchen modernization.

Property tax deductions and energy tax credits are just a few of the tax benefits of buying a home. You may also be eligible for other tax breaks such as a home office expense deduction or deductions for medically necessary home improvements. For further guidance on reducing your tax liability, consult a tax professional regarding your specific tax implications.

Guild Mortgage has more than 1,000 loan officers standing by to answer your questions and guide you through the homebuying process. Search by your location to find a Guild Mortgage branch near you.

The above information is for educational purposes only. All information, loan programs and interest rates are subject to change without notice. All loans subject to underwriter approval. Terms and conditions apply. Always consult an accountant or tax advisor for full eligibility requirements on tax deduction.

1Chipping away at the mortgage deduction – The Brookings Institution

2Topic No. 504 Home Mortgage Points – IRS.gov

3Are Home Improvements Tax Deductible? – houselogic by REALTORS

4Are Home Improvements Tax Deductible? – houselogic by REALTORS

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About the Author: Guild Mortgage

Founded in 1960 when the modern U.S. mortgage industry was just forming, Guild Mortgage Company is a nationally recognized independent mortgage lender providing residential mortgage products and local in-house origination and servicing. Guild’s collaborative culture and commitment to diversity and inclusion enable it to deliver a personalized experience for each customer. With more than 4,000 employees and over 250 retail branches, Guild has relationships with credit unions, community banks, and other financial institutions and services loans in 49 states and the District of Columbia. Guild’s highly trained loan professionals are experienced in government-sponsored programs such as FHA, VA, USDA, down payment assistance programs and other specialized loan programs. Guild Mortgage Company is a wholly owned subsidiary of Guild Holdings Company, whose shares of Class A common stock trade on the New York Stock Exchange under the symbol GHLD.