I Bought a Home Last Year. Do I Get a Tax Deduction?

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The answer to that question is yes – but it may be limited based on your situation. Due to tax reform passed in December 2017, you can still take tax deductions for certain expenses related to home ownership, however those tax deductions may be less than they once were.

Mortgage Interest & Real Estate Taxes Are Still Tax-Deductible

The two biggest tax deductions related to home ownership are mortgage interest and real estate taxes. Both are still deductible under the new tax law, but they have been limited by aspects of the new law.

Mortgage Interest Deduction Is Lower

The deduction still exists, but it is lower. Under the old tax law, you deduct interest paid based on a mortgage of up to $1 million if the loan was to purchase, build, or improve your home. Under the new tax law, you can deduct interest based on a mortgage of $750,000 to all home loans originated after December 15, 2017. Loans that were originated before that are subject to the old law.

There’s been some confusion over home equity loans and home equity lines of credit. Interest is still tax-deductible when used to purchase, build, or improve the home. However, it is no longer deductible if the loan proceeds were used for purposes other than the home.

Changes to the Real Estate Tax Deduction

Similar to mortgage interest, real estate taxes are still tax-deductible but may be capped depending on how much your state income taxes or sales and local income taxes are. Prior to 2018, the real estate tax deduction was virtually unlimited. If you claimed itemized deductions, most tax filers would claim all of their real estate taxes.

However, under the new tax law, the limit is $10,000 for married couples and singles filers. It’s $5,000 if you’re married, but filing separately. The limit applies to real estate taxes and state income or state and local taxes otherwise known as SALT. That means if you itemize your deductions and pay $4,000 in state income tax, your real estate tax deduction will be limited to $6,000 even if you paid more than $6,000.

The Standard Deduction Is Higher

Under tax reform, the standard deduction increased to the point where it may not make sense for a homeowner to claim itemized deductions if the homeowner’s itemized deductions are less than the standard deduction. For 2019, the standard deduction has been increased to $24,400 for married couples filing jointly, $18,350 for heads of households, and $12,200 for single filers.

Even though mortgage interest and real estate taxes can still be deducted, fewer people may be able to itemize because the standard deduction has doubled. TurboTax estimates and the IRS confirmed that about 90% of taxpayers will take the standard deduction. Prior to the new tax law, about 70% took the standard deduction.

Although more taxpayers will now take the standard deduction, you may be able to push yourself over the standard deduction by donating to charity or making sure you claim your medical expenses over 10% of your adjusted gross income.

Phaseout of Itemized Deductions Was Eliminated

The phase-out of itemized deductions for high-income households was eliminated under tax reform. With the phaseout gone, a high-income couple can purchase a $1 million home with a $750,000 mortgage at 5%. With a mortgage interest deduction of $37,500, plus $10,000 in real estate taxes (we’ll assume the couple lives in a state with no state income tax to make the math simpler), the total of $47,500 in home-related expenses will be fully tax-deductible.

High-income single filers benefit as well. Let’s say a single person earning $200,000 per year pays $20,000 in mortgage interest and $10,000 in property taxes. The taxpayer will be able to deduct the entire amount of $30,000. He or she will get the benefit of the amount that exceeds the $12,200 standard deduction for single filers, or $18,350 for head of household. To summarize, you may still get a tax deduction if you bought a home in 2019.

No need to worry about knowing these tax rules. TurboTax will ask you simple questions about you and give you the tax deductions and credits you’re eligible for based on your entries. If you have questions, you can connect live via one-way video to a TurboTax Live CPA or Enrolled Agent with an average 15 years experience to get your tax questions answered.  TurboTax Live CPAs and Enrolled Agents can also review, sign and file your tax return, and are available in English and Spanish year-round.

Comments (2) Leave your comment

    1. Hello Gail,

      The cash you take out is not considered taxable income. However, the interest on your refinance loan tax consequences have changed.

      Under the Tax Reform changes effective tax year 2018, you are only able to deduct the interest on loans used to purchase, build or substantially renovate your home. If the funds were used to take a vacation, etc, then the interest may not be deducted as an Itemized deduction.

      Thank you

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