Life Events Series: How Will Buying My First House Help My Taxes?

A great milestone of your financial life is the purchase of your first home.  While less exciting, the tax implications of that achievement are no less critical.  After all, home ownership creates several new opportunities for you to save on your federal income taxes.  Got your attention?

Couple admiring a new house.

Mortgage Interest Deduction

That big fat mortgage payment you now have to pay every month has an upside. The interest portion of every payment is tax deductible.  Keep in mind that, at the beginning of your mortgage, most of your payment is interest, meaning that the overwhelming majority of your payment is tax deductible.

Real Estate Tax Deduction

Every dollar you pay in real estate taxes is deductible.  While it’s never fun to learn that your property taxes have gone up again, at least you will be able to take some solace in knowing your tax deductions (and your resulting income tax savings) will increase at the same rate.

Charitable Donation Deduction

While the charitable donation deduction might seem unrelated to a home purchase, this is income taxes we’re talking about.  Before you purchased your home, you may not have had enough tax deductions to itemize your deductions.

Why?  Since your standard deduction was greater than your itemized deductions, you did not benefit from any of the itemized deductions you could have otherwise taken.  But when you became a homeowner, the mortgage interest and real estate taxes alone often make it so that you will be able to itemize and you are now eligible for additional tax deductions. The most common of these is the charitable donation deduction. So, if you tithe at church or give clothes to the Vietnam Veterans, you will now also receive a tax benefit from doing so.

Other Considerations for First Time Home Buyers

Save your closing form (HUD).  When you file your tax return for the first time after buying a home, additional expenses incurred on your HUD may be deductible, including prepaid interest (points) you pay at closing.

Save all of your home improvement receipts.  You are likely to sell your home one day.  Most home sales do not result in income tax.  However, it is possible if you move very quickly or make a very big profit. To lessen the odds you will owe capital gains taxes on the sale of your home, save your receipts!

Welcome to the world of home ownership. It can be wonderful and expensive. Make sure you take advantage of every opportunity to keep your costs in line.  Start with taking maximum advantage of the tax deductions available to you.

Don’t worry about knowing all of these tax deductions, TurboTax will ask you simple questions, and give you the tax deductions you’re eligible for.  If you have questions, only TurboTax lets you talk to CPAs, Enrolled Agents, and tax attorneys while you prepare your tax return, free.

Michael Rubin

Author of the bestseller Beyond Paycheck to Paycheck, and the upcoming The Savings Solution, Michael B. Rubin is a Certified Public Accountant (CPA) and a CERTIFIED FINANCIAL PLANNER professional. In addition to his experience providing sophisticated financial advice to affluent clients, Michael has been a key source of information for over a decade to countless others. He speaks passionately about and provides guidance on virtually all personal financial planning topics. Michael has appeared in various media, including radio and TV stations across the country, plus national media such as CNN Money.com, latimes.com, The Wall Street Journal, SmartMoney.com, Chicago Tribune, Financial Advisor Magazine, and Investment News. Prior to founding Total Candor LLC, Michael worked in the personal financial services practices of two of the former "Big Six" accounting firms. Subsequently working for several years as a new venture executive for Toys "R" Us, Inc., he made sure that he never actually grew up. He holds an undergraduate business degree from the Ross School of Business at the University of Michigan and an MBA from the Kellogg School of Management at Northwestern University. Michael lives in New Hampshire with his wife and children.

Comments (5) Leave your comment

  1. I normally receive my turbo tax by mail, I have not received it as of yet, however I might need a upgrade I purchased a new home this year and also I am owner financing my mobile home that I used live in.. Any help would be appreciated.

  2. Last year I paid my 2012 taxes in January. This year I am able to pay my 2013 taxes in December. Am I allowed to deduct both since they were paid in 2013?

  3. My husband and I bought our first home 3 years ago. He is very handy and have made some major changes to the house, such as changing a window onto a patio door that has access to the side yard and to a newly built deck. Since this work was not done by a contractor, can we still deduct the cost of these upgrades, AND are these tax deductible when we sell the house or before?

    • Hi Britany,
      The materials and supplies used for the improvements are added to the cost basis of your house. You cannot add the value of your husband’s labor. There is no deduction for them currently.
      When you sell the house, you will include these costs in determining the profit you make on the sale, and if the profit exceeds a certain amount, ($500,000 for a married couple filing a joint tax return) you will be taxed on the excess.
      Mary Ellen

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